The IDC was established in 1940 by an Act of Parliament (Industrial Development Corporation Act, No 22 of 1940), as a result of a report by a commission led by Dr HJ van Eck who later became the Corporation’s first Managing Director. The commission’s report concluded that South Africa, despite its abundant mineral resources, was lagging in development. The commission cited the country’s inefficient use of its natural resources as one of the reasons for slow growth, noting that a high proportion of manufactured goods, including machinery, timber and textiles was imported at the expense of local manufacturing. Key milestones: In 1941, the IDC granted its first loan to Ouma Rusks, assisting the company to expand production of its brand of rusks made from a traditional local recipe for biscuits. In 1950, the Corporation funded the establishment of Sasol, which has since grown to be a global petro- chemicals giant. In 1962, an export credit financing scheme was set up to help local companies export their products, and in 1964, t h e Corporation established its Small Industries division with the objective of assisting emerging 2016 Integrated Report small industrialists. A key subsequent milestone in 1972 was the establishment of a pilot plant at Richards Bay Minerals for the reclamation of titanium minerals from beach sand. In 1979, in partnership with Siemens, the South African Post Office and the CSIR, the IDC committed to the establishment of South Africa’s Micro-electric Centre – a catalytic development for the country’s industrial research capabilities. In 1988, the Corporation acquired a minority shareholding in steel manufacturer ISCOR, since renamed Arcelor Mittal SA, and later funded the Algorax/Degussa project in Port Elizabeth for the manufacturing and export of automotive catalytic converters. In 1991 to 1992, the IDC paid a record dividend of R1 billion which its shareholder channelled to the Development Bank of Southern Africa. In yet another landmark transaction marking the Corporation’s shift to the promotion of Black Economic Empowerment (BEE), in 1993 t h e I D C purchased and warehoused Metropolitan Life shares for BEE group New African Investment Limited. The Corporation later became a significant player in the BEE arena, a development that led to the emergence and proliferation of black-owned businesses. Over the last 20 years, the IDC has facilitated the creation of over 453 000 jobs, and during that period, has invested in a range of sectors including, among others, R46 billion in metals and machinery, R34 billion in mining, R20 billion in chemicals and petroleum, R16 billion in agro- processing and R11 billion in t o u r i s m and restaurants. In the 75 years spanning its existence, the Corporation has played a catalytic role in establishing and increasing the capacity of a number of companies that have since grown to become cornerstones of the local economy, including Ouma Rusks, Sasol, Foskor, Hulamin, Safmarine, Richards Bay Minerals, Karsten Boerdery, Hans Merensky, Palaborwa Mining Corporation, Hernic Ferrochrome, Incwala Resources, Kumba Iron Ore, York Timber, Imbani Platinum, Durfeco Steel Processing and KaXu Solar One. After extending its mandate in 1999 to include investing in economies in the rest of Africa, the IDC became a member of a consortium of investors from around the globe that established MOZAL, an aluminium smelter based in Mozambique. Ohorongo Driving South Africa’s competitiveness Cement in Namibia forms part of our flagship projects in the rest of Africa. Other investments through industrial development in Africa span various sectors, including mining, agriculture, manufacturing, tourism and infrastructure. Against the backdrop of severe economic headwinds, including the global economic recession in 2008, the 2000s era prompted the Corporation to take up a more proactive role in helping South Africa to mitigate the effects and impact of the global financial meltdown. During this period the IDC also part-funded, among other iconic infrastructure projects, the construction of the Gautrain rapid rail link, while its special funding schemes, specifically designed to help struggling businesses at the height of the recession, were attributable in helping stave off a full-scale economic recession. The Corporation has also instrumental in de-risking the green economy by funding the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) projects that are expected to add 1 408MW of power to the national grid. INDUSTRIAL DEVELOPMENT CORPORATION: A 75-YEAR JOURNEY
IDC went on to fund a raft of subsequent empowerment transactions, notable among which was the funding and creation of Exxaro – which was one of the first black-owned coal mining companies to be listed on the Johannesburg Stock Exchange (JSE). Keen to integrate and advance regional economic development, government mandated the Corporation to extend its investment in the rest of Africa, and Mozal, an aluminium smelting plant in Mozambique, became the first IDC-funded project outside SA. Mozal’s significance is such that it has grown to become one of the largest employers in Mozambique. The IDC not only invested in the plant but is also credited with securing investors from around the globe to establish a major industrial enterprise in a country that was still recovering from decades of a brutal civil war. With the advent of democracy in 1994, the IDC IDC’s support for Mozal echoed its early role in the South African aligned to the new priorities of the country, economy. Born from a need to accelerate economic growth, IDC including the new policy frameworks of the was established by Parliament through the Industrial Development Corporation Act, No 22 of 1940. This came about as a result of a government, especially the Industrial Policy Action conviction that the country should reduce its inefficient use of Plan (IPAP), the New Growth Path (NGP) and the natural resources, typically exported as raw materials, and modernise National Development Plan (NDP). Leveraging the its economy by manufacturing more goods locally. At the same diverse skillset of its human capital and its financial time, the country would target the production of essential goods that were becoming scarce given the impact on trade as a result of strength, IDC has been instrumental in creating World War II. industries that today form the spine of the country’s Shortly after its establishment, the IDC gave its first start-up loan industrial capacity while proactively addressing to a Mrs Greyvenstein who used this loan to build her small home- the negative legacy of Apartheid. Its investment based industry into the popular Ouma Rusks brand, assisting this decisions have often had a wide-ranging impact small home-based outfit to expand its production capacity. During not only on SA, but also the African continent’s its first 50 years of operation, the IDC became instrumental in commissioning many large industrial projects including the petro- developmental agenda. chemicals giant Sasol, the fertiliser manufacturer Foskor, the copper producer Palabora Mining, and the aluminium manufacturer Alusaf A watershed moment for South Africa had been the release in 1990 among others. of President Nelson Mandela, culminating in the first democratic The 2000s saw the IDC part-fund the construction of the Gautrain elections and the re-integration of the country into the global rapid rail link as well as the establishment of telecoms start-up economic community. The post-democratic era saw the democratic Neotel and the television broadcaster CNBC Africa. The Corporation’s government adopt economic policies aimed at restructuring the role in developing the local film industry came to the fore leading to economy with the Reconstruction and Development Programme the funding of award-winning movies such as Tsotsi, Hotel Rwanda, (RDP) becoming the focal point in the government’s transformation Skin, and Drum, the film based on stories of Sophiatown. Mandela’s objectives. Notable among other policy developments was Long Walk to Freedom would later be funded by the IDC in 2013. government’s adoption of Black Economic Empowerment (BEE) – a policy designed to accelerate the participation of black people in Of particular significance is the initiative launched during the global the mainstream economy. economic crisis, which saw the Corporation, through a R6.1 billion Distress Fund, provide relief to distressed companies. The Distress The nineties saw the IDC providing funding that established the Fund helped to mitigate the impact of a local economic slowdown table grape industry in the Northern Cape and begin investing in in the wake of the collapse of global financial markets in 2008. the tourism industry. In addition to these industry interventions, the IDC proved catalytic in advancing government’s BEE policies by The NGP, IPAP, NDP and National Infrastructure Plan (NIP) are funding the first BEE transaction. In that transaction, the Corporation cornerstones of the government’s developmental agenda. purchased and warehoused Metropolitan shares for New Africa Within the context of its mandate, IDC has embraced these Investments Limited (NAIL) – a consortium of black entrepreneurs. policy frameworks and sought to define its role in assisting the
Workers installing solar panels at one of the renewable energy projects funded by IDC. government further its developmental objectives. Maintaining The IDC Act of 1940 envisaged a body that would facilitate, promote, its relevance in the current economic landscape, the Corporation guide and assist the financing of industries to promote the growth has also played a critical role in de-risking the green economy of local manufacturing. IDC has done just that and looks forward to by funding Renewable Energy Independent Power Producer the next 75 years of relevance and impact. Procurement Programme (REIPPPP) projects that are expected to add 1408 MW of power to the national grid. As a result, the private sector is increasingly making forays into the green economy and creating more employment opportunities. Despite strong economic headwinds recently, impacting negatively on a manufacturing sector burdened by fierce foreign competition in the domestic and traditional export markets, the IDC maintains its role as government’s key development agent in the industry. IDC’s new strategy under Project Evolve focuses on developing priority value chains to ensure SA’s competitiveness, enhance the impact of the Corporation on the SA economy and facilitate job creation. IDC gave its first start-up loan to Ouma Rusks, enabling this home-run business to increase production.
APPROVALS* AND NUMBER OF IDC IMPACT TRANSACTIONS SINCE 1940
* Approval figures per 10-year period at Rand values prevailing at the time. The post-1994 era has seen the Corporation contribute significantly to the expansion and diversification of SA’s industrial base and in 1940s 1950s the process facilitating job creation, reducing TOTAL NUMBER: TOTAL NUMBER: inequality and promoting economic growth. 130 150 Given South Africa’s history, inclusive growth TOTAL VALUE: TOTAL VALUE: and structural economic transformation have been key focus areas for both government R16m R144m and the private sector as they seek to help the country realise its full economic potential. The role of the IDC has been critical to helping the country achieve 1960s 1970s these objectives. TOTAL NUMBER: TOTAL NUMBER: 770 1 300 CUMULATIVE JOBS CREATED TOTAL VALUE: TOTAL VALUE: AND SAVED R540m R2.5bn PAST FIVE YEARS 124 000 PAST 10 YEARS 274 000 PAST 20 YEARS 453 000 1980s 1990s TOTAL NUMBER: TOTAL NUMBER: COMMITMENT TO SELECT SECTORS 1 400 2 600 OVER THE LAST 20 YEARS TOTAL VALUE: TOTAL VALUE: R46bn R34bn R6.1bn R37.2bn METALS AND MINING MACHINERY
2000s 2010s R20bn R11bn TOTAL NUMBER: TOTAL NUMBER: CHEMICALS AND TOURISM AND 2 900 1 550 PETROLEUM RESTAURANTS TOTAL VALUE: TOTAL VALUE: R14bn R16bn R58.9bn R84.1bn RENEWABLE ENERGY AGRO-PROCESSING
2016 Integrated Report 1 SUPPLEMENTARY ONLINE 5 INFORMATION CONTENTS
The following additional OUR DEVELOPMENTAL information is available 1 ROLE AND MODEL online on our website. 3 Committed to transparent reporting 4 Performance highlights 5 Our leadership 20 Overview of the IDC Corporate governance 22 Our strategy Board meetings and meeting attendance, Board 26 Materiality committees, Board Investment Committee (BIC), 27 Our business model Human Capital and Nominations Committee (HCNC), Report of the Board Human Capital and PERFORMANCE Nominations Committee, Board Audit Committee, AND IMPACT Board Risk and Sustainability Committee (BR&SC), 2 Social and Ethics Committee (SEC), Executive 29 Impacting on industrial development Management Committee (EXCO), Ethics and 40 Contributing to socio-economic development managing director’s conflicts of interest, 47 Building strong partnerships Governance training and assessment of clients/ 54 Committed to good governance investee companies, Centre for Corporate 64 Impact on financial sustainability Governance. Human capital Actual numbers of employees per band, gender STATUTORY AND ADDITIONAL and ethnic origin, Occupational levels, Staff 3 INFORMATION numbers per region excluding head office employees, Staff movement for the period 2016, 70 Confirmation of accuracy and fair presentation Talent attraction and retention rates, Comparative 71 Independent assurance providers' limited assurance report on summary of investment in staff training. selected performance information Information technology 73 Accounting officer’s statement of responsibility for Annual Financial Statements Strategic initiatives, IT and business alignment 74 Independent Auditor's report to Parliament on the consolidated Procurement and separate financial statements 76 Report of the Board Audit Committee Preferential procurement 78 Group Company Secretary’s certificate Special funding schemes 79 Directors’ report Memberships ANNUAL FINANCIAL Customer relationship 4 STATEMENTS management 84 Statement of financial position King III checklist 85 Statement of comprehensive income 86 Statement of changes in equity GRI table 88 Statement of cash flows 89 Geographical segments 90 Reportable segments 92 Notes to the Annual Financial Statements
151 ACRONYMS AND ABBREVIATIONS 153 CONTACT US 154 SATELLITE OFFICES IBC ADMINISTRATION
ONLINE REPORTS Read more about IDC www.idc.co.za LA Refers to Limited Assurance
2 Industrial Development Corporation of South Africa Limited COMMITTED TO TRANSPARENT REPORTING
The IDC is committed to and fully embraces the principles Similar to our previous reports, a combined financial of integrated reporting. Accordingly, the 2016 Integrated and non-financial assurance team from KPMG and Report largely demonstrates our continued commitment SizweNtsalubaGobodo (SNG), supported by the IDC’s internal to integrating sustainability across our organisation and its audit team, adopted a combined assurance approach to subsidiaries. When referring to “IDC”, “we” or “our”, we mean the information in this report. the Industrial Development Corporation and our subsidiaries In addition to the Annual Financial Statements and opinions Findevco, Impofin and Konoil. included here, selected performance information was assured In following on the Global Reporting Initiative Guidelines 4 at a limited assurance level according to the International (GRI G4) adopted in our 2014 report, this report covers Standards for Assurance Engagements (ISAE 3000), assurance our financial and non-financial strategy, performance engagements other than audits and reviews of historical aspects and prospects for the financial year 1 April 2015 information. The external auditors assured the financial to 31 March 2016. In addition, the report covers the five section of this report. The IDC Board Audit Committee material aspects identified as core to the IDC business. verified the independence of the external assurance providers These material matters were established taking into account of the IDC. published guidelines of Global Reporting Initiative (GRI), We appreciate your feedback. Kindly submit queries and the International Integrated Reporting Council (IIRC) and comments to [email protected] or [email protected]. the International Federation of Accountants (IFAC). Doing so ensures that the matters identified are sufficiently important concerns, which could substantively influence the assessments and decisions of key stakeholders (refer to page 26). This process involved the analysis of the following internal and external factors: • Significant risks to the IDC as defined by our Enterprise Risk Management (ERM) process • Concerns and expectations of our stakeholders • Review and benchmarking material industry-wide issues • Review by IDC Executive Management Committee (EXCO) • Advice from external specialists Reporting boundaries are further refined for each material aspect. In preparing the report, management considered the integrated reporting guidelines provided by the following: • South African Report of Corporate Practice (King III Report) • This report contains Standard Disclosures from the GRI Sustainability Reporting Guidelines and a list of these Standard Disclosures can be found online in our GRI G4 table • Guidance issued by the Integrated Reporting Committee (IRC) of South Africa and the International Integrated Reporting
2016 Integrated Report 3 1 OUR DEVELOPMENTAL ROLE MODEL
PERFORMANCE HIGHLIGHTS
The IDC has heeded the call to rise to the challenge with pleasing performance against its development objectives.
This performance not only demonstrates the IDC’s grasp of its new proactive approach adopted in 2015 aimed at developing critical sectors to increase its impact, but also its agility in responding to economic challenges while staying on course with its long-term trajectory.
R14.5bn LA R11.4bn Approvals of Total funding 180 transactions disbursed
15 272 R4.9bn* Jobs expected to be Approved for black- created and saved empowered companies
R2.9bn R8.9bn Approved for black Approved for industrialists manufacturing
R1.2bn R970m Approved for businesses Approved for businesses with women ownership with youth ownership of of more than 25% more than 25%
* Excluding funding to subsidiaries
4 Industrial Development Corporation of South Africa Limited Shareholder commentary Minister Ebrahim Patel
Industrial development is at the heart of our economic strategy global economy. The IDC was mandated to expand its efforts and a key means to create jobs, expand the economy and combat and it has shown it is prepared to back young people who poverty and inequality. The IDC is a key public institution that have good business projects, passion, commitment and a drives job-rich industrialisation in South Africa. preparedness to work hard. • To improve support for black industrialists and drive the I am pleased therefore to receive this Annual Report which sets broadening of wealth creation in the country, the IDC out the progress of the IDC in the past year and illustrates the approved transactions involving 54 black industrialists with a bland figures with the human and enterprise stories that bring capital commitment of R2.9 billion, an increase of 45%. These these figures to life. investments are expected to create more than 2 200 new jobs and support the evolution of empowerment programmes It has been a tough year for industry: a global economy that into a new, strongly pro-growth endeavour. grew slowly which placed pressures on our exports, a depressed commodity market that dramatically reduced demand and prices • To improve funding for women-owned businesses, the IDC approved transactions worth R1.2 billion, an increase of 59% for many local minerals and the most severe drought in more on the previous year and tapping the enterprise of women in than a century that impacted both on agriculture and on large the economy. The release of the IDC’s annual financial results industrial users of water. during Women’s Month in 2016 is therefore very fitting! These wider, contextual factors affect the IDC portfolio very The IDC provides a range of services to the state that is not fully directly, particularly given the large exposure of the Corporation to captured in the financial reports of the Corporation, including key commodity markets: for example, the decline in mineral and a Unit that works on unblocking and facilitating infrastructure oil prices accompanied by a global glut in steel, affected dividend development, a team that provides quality economic analysis and incomes of the IDC in its mature legacy investment portfolio, an a staff complement with significant sector industrial knowledge important source of funding for investment in new sectors. that can be used to improve policy-making. In these tough conditions, the IDC is not only affected by Balancing these positive stories are challenges that the IDC must the new market conditions, but is crucially a counter-cyclical resolve: particularly to place key investments such as Scaw Metals investment force that crowds in private investment by showing a (steel products) and Foskor (fertilisers) on a more commercially- commitment to an investment-led recovery. sustainable path. These industrial giants play a key role in the The prudent management of the IDC finances in better times economy and their turnaround is important both for the wider places the institution in a position to respond to the new efforts to reignite economic growth and to ensure they do not conditions. IDC investment included support for new enterprises, drain the resources of the IDC. I have requested the IDC to place for existing companies to improve their competitiveness and emphasis on finalising and implementing a strategy to manage productivity and for efforts to claw back parts of the domestic these companies into sustainability. market lost to imports previously as well as to export more, The increase in approvals needs to be maintained in the year particularly to the rest of the continent. ahead and the rate of disbursements must be lifted significantly In the past year, the IDC approved R14.5 billion of new investment, for the counter-cyclical effect to be realised. And to ensure its highest nominal level to date and an increase of 26% compared that the investments are sustainable and impairment levels are to the previous year. These investment approvals are expected maintained at prudent levels, the IDC should do this together with to create or save 15 272 direct jobs, in sectors such as advanced improving both its capacity to evaluate risk and to mitigate such manufacturing, metals fabrication and clothing and textiles. risk through efforts to support businesses and the development of viable business plans. But the volume of investment is not a sufficient metric to ensure that we meet key development goals. I am pleased therefore to South Africa needs to do more to export manufactured products note the following three developments: in labour-intensive sectors and move away from the large reliance • To increase investment in youth empowered enterprises, on the export of raw materials. The IDC has a role to play in the IDC approved projects worth R970 million for the year, a driving that focus and leveraging opportunities from traditional fourfold increase on last year’s R243 million. In 2013, the Youth sources of investment in Europe and the United States as well Employment Accord was adopted at the Hector Pieterson as the increasingly important BRICS partner countries. A good Memorial in Soweto. We committed to do even more to case in point is the agreement signed between a large Chinese stimulate youth entrepreneurship so that we can unlock auto-maker and the IDC that will see the first new light passenger the energy and enterprise of a connected, techno-savvy vehicle assembly plant built in South Africa in more than 40 years. generation whose efforts are reshaping key parts of the
2016 Integrated Report 5 1 OUR DEVELOPMENTAL ROLE MODEL
SHAREHOLDER COMMENTARY (continued)
IDC funding facilitated expansion of this plant, Pasdec which is a manufacturer of electronic units and wire harnesses used in automobiles. IDC investment in the automobile sector will significantly boost growth prospects for suppliers of automobile components such as Pasdec.
In the previous year’s annual report, I drew attention to six key The IDC operates in an economy shaped by many developments, “I’s” that underpin economic development, namely infrastructure global and local. We need to shape those that we can influence. expansion, industrialisation, investment, innovation, inclusion It is clear that a broader agreement between social partners – (social and economic) and integration of the continental business, labour and government – can help to reignite inclusive economy. growth and creation of decent work opportunities. A stronger, more urgent national effort is required to address unemployment, This year, I wish to point to three critical “I’s” that should poverty and inequality – solid job-rich industrialisation accompany these six, which are relevant to the IDC but which are underpinned by social partnership can play a key role to achieve also applicable to the wider economy: this. The IDC should encourage business and labour to work • Integrity: for the IDC to demonstrate the utmost probity more closely at enterprise level in those companies that are in its and integrity in its consideration of applications, to treat all portfolio and in this way help to strengthen inclusive growth and potential and current customers fairly without any improper the fair sharing of the results of growth. consideration or payments and to actively combat fraud and corruption (“integrity to promote industrialisation”); Finally, the IDC performance is driven by the IDC-family: let me • Institution-building: to build on the solid foundations of the thank Ms Busi Mabuza and the Board of the IDC which provides a institution by expanding its skilled staff base and improving strong governance framework for the institution, Geoffrey Qhena, performance against high economic and development targets who leads the IDC with deftness in challenging times and the staff set by the Shareholder. Institution-building includes attracting who translate the goals of the IDC into practical investible projects skills that go beyond the industrial banking function of the and opportunities. IDC to capabilities to initiate large new opportunities for the economy (“the next Sasol”); • Implementation: ensuring that the vision of government on deepening industrial development, expanding job creation, greening the economy and broadening the entrepreneurial E Patel base with black industrialists, youth and women – is realised Minister of Economic Development (“a hundred jobs created is worth more than a thousand simply promised”). 30 June 2016
6 Industrial Development Corporation of South Africa Limited Leadership commentary Board Chairperson
The IDC commemorated Today we see ourselves as a truly African development finance institution. The extension from 1997 onwards of the IDC’s its 75th anniversary during geographical mandate to the continent at large has enabled us the past year, an important to finance many African businesses and investment projects, milestone in our corporate contributing to regional integration. history. As our economy went through many cyclical phases during the past 75 years, the IDC has striven to respond with the necessary flexibility. We always take a long-term view, looking beyond the current stage of the economic cycle in our assessments of business opportunities, strategic plans and actions.
A CHALLENGING ECONOMIC ENVIRONMENT Notwithstanding the dramatic process involved in South Africa’s Similarly to many other economies around the globe, the South transition to democracy, its economy has changed enormously African economy has struggled since the global financial crisis since 1940. The IDC has contributed significantly to its expansion and the ensuing great recession. Domestic structural constraints, and diversification into Africa’s most industrialised economy. As a particularly of an infrastructural nature, have also contributed to development financier, we can celebrate many successes over this the slow pace of recovery. The economy’s performance has been period and have certainly left our mark on many of the industries substantially below potential since 2009, and conditions have and global players of today. We have also sought to learn from deteriorated further in recent times. Economic growth slowed our mistakes, and from the practices and experiences of our peers throughout the financial year and turned negative in the final locally and abroad. quarter. The rate of increase in gross domestic product for the South African society is radically different today, with the extent period as a whole amounted to 0.6% (1.3% for calendar year 2015). of its political transformation hardly imaginable back in 1940. The productive sectors of the economy, which form the core The national priorities identified by the governments of the day of the IDC’s operations, have been the most affected. Harshly changed over the years, and the IDC’s mandate, operating model, impacted by the worst drought on record, the agriculture sector’s corporate make-up and other aspects of our business have output decreased by 8.8% in real terms during the review period. evolved accordingly. We are proud to have played a meaningful The sharp downturn in global commodities markets, which began role in the creation of a new society since the onset of democracy in 2011, continued to impact negatively on the mining sector’s in 1994, but much more lies ahead in this transformation journey, performance (-0.6%). Manufacturing output also fell by 0.6%, with for our economy must benefit all our citizens. To this end, the several industries experiencing very difficult operating conditions. IDC’s current strategic orientation and operational activities are guided by the Industrial Policy Action Plan, the Agricultural Policy Subdued demand locally and abroad has affected the sales Action Plan, the National Infrastructure Plan, the New Growth Path revenues of many business enterprises, while rising costs of as the country’s medium-term economic development strategy, production and infrastructure constraints have impacted on and the long-term vision and goals captured in the National profitability and output levels. Business confidence dropped Development Plan. throughout the year and resulted in a 2.7% contraction in fixed investment by private business enterprises. The world’s economic landscape became increasingly complex, competitive and innovative, especially over the past two or The prevailing cyclical difficulties are temporary and the structural three decades. The forces of globalisation and major changes challenges are being addressed, progressively raising the to the world’s economic governance have altered its workings economy’s growth potential for the benefit of all. Our country is irreversibly. The centre of economic gravity has also been shifting blessed with enormous talent and a wealth of natural resources. rapidly from West to East, and gradually from North to South. Furthermore, we have demonstrated time and time again our The IDC has supported South African enterprises in adapting to ability to overcome adversity. these global forces and trends, consistently seeking to counter the At the IDC, we are, therefore, very positive about threat of de-industrialisation, and assisting businesses in exploiting the opportunities that have been opening up in global markets, the future of our country as a winning nation. especially in faster-growing emerging and developing economies.
2016 Integrated Report 7 1 OUR DEVELOPMENTAL ROLE MODEL
LEADERSHIP COMMENTARY (continued)
FOCUSED FOR GREATER IMPACT The financial performance of the IDC Group during the review period was adversely affected by the generalised slowing of The IDC has been strategically repositioned to help realise such economic activity locally and abroad, and by the impact of a future. down-trending commodities markets on a resource-biased The realities faced by the South African economy at the present equity portfolio. time call for a strong response from an agile and dynamic While the IDC Company made a profit of R177 million, the organisation. As communicated in our previous integrated report, poor performance of key subsidiaries resulted in the IDC Group the implementation of Project Evolve, a strategic initiative aiming recording a lower consolidated profit of R223 million in 2016 to enhance the impact of the IDC’s activities on the economy, and compared to the previous year’s R1.7 billion profit. The drop in fostering inclusive development, began in April 2015. This entailed Group revenue, from R19.6 billion to R19.4 billion was mainly a fundamental shift in focus toward specific industry value chains underscored by lower dividends received and by the weaker and key sectors to leverage economic linkages and enhance performance of our subsidiary, Scaw South Africa (Pty) Ltd, which competitiveness. operates in the distressed steel industry. Although Foskor (Pty) We are deepening our understanding of the dynamics of the Ltd made a loss of R568 million, its revenue was 11% higher than prioritised value chains and their present challenges, identifying in 2015, largely due to the positive effect of a weaker exchange specific areas for IDC intervention to realise growth opportunities rate of the Rand vis-à-vis the US Dollar on selling prices. Given and achieve the desired developmental returns. Systems and the impact of major subsidiaries on the Group’s performance procedures were sharpened during the year to drive efficiencies and sustainability they will remain areas of strategic focus and effectiveness, and we cultivated a client-centric and solutions- going forward. oriented approach across the Corporation. The cumulative level of impairments increased to R11.8 billion, The intended outcomes are starting to come to fruition. A more representing 16.9% (2015: 16.7%) of the total outstanding book focused and proactive approach is catalysing investment activity at cost. The management of impairments remains key and, and enhancing enterprise competitiveness in the productive considering the relatively subdued economic environment sectors of the economy, especially in the processing industries. anticipated in the short- to medium-term, we will continue It is also helping to address some of the prevailing infrastructural implementing various mitigating initiatives. constraints, particularly in the energy sector. In light of the above, total assets declined to R121.3 billion LA Our funding approvals reached an all-time (2015: R122.3 billion), largely due to the lower fair value of BHP high of R14.5 billion in the past year. This will Billiton and Kumba Iron Ore, while capital and reserves decreased to R84.7 billion (2015: R89.8 billion). A higher level of funding enable our business partners to roll out their activity through loans and advances to our client base required investment plans in the near term, principally increased borrowings. Set against lower reserves, this resulted in in the following value chains: basic metals, a higher debt/equity ratio of 33.0% (2015: 26.8%). metal products and mining; basic and speciality APPRECIATION chemicals; machinery and equipment; The IDC’s achievements during a difficult year for the South automotive and transport equipment; African economy would not have been possible without the agro-processing and agriculture; and chemical commitment and efforts of its management and staff, under the leadership of the Chief Executive Officer, Mr Geoffrey Qhena, and products and pharmaceuticals. his executive team. On behalf of the Board, I express our gratitude As part of our commitment to help address, in conjunction with for their steadfastness in this landmark anniversary year. private and public sector partners, South Africa’s electricity deficit I also thank my fellow directors for their dedication and support in a sustainable and environmentally responsible manner, we during a year in which the IDC embedded its new game- approved further funding for renewable energy projects, co- changing strategic initiative. Towards the end of the year we bade generation and energy efficiency solutions. Not included in the farewell to Mr ZJ Vavi, who diligently served the Board for several R14.5 billion approval figure above are billions of rands allocated years. We also welcomed Mr A Kriel and Ms M More, and look to renewable energy projects but awaiting decision as part of forward to their insights and contributions in the years ahead. government’s Renewable Energy IPPP programme. On behalf of the IDC, I extend our appreciation to Minister Disbursements totaled R11.4 billion, contributing significantly Ebrahim Patel for his guidance, confidence in, and high regard towards fixed investment in the economy throughout the year. for the IDC as a leading agent of industrial development and The funds were invested in electricity generation; basic metals, economic transformation. We remain resolute in promoting South metal products and machinery industries; chemical production, Africa as a successful and globally competitive economy which and, among others, mining operations. will realise its true potential. A more customised and focused approach to the funding of black entrepreneurs, and women-empowered and youth-owned businesses, resulted in quantum increases in financing approved for each of these priority customer segments, and contributed to the transformation of the economy. BA Mabuza FINANCIAL RESILIENCE Board Chairperson To roll out our industrial development strategies and funding 30 June 2016 plans going forward, we need to safeguard the IDC’s sustainability through robust financial and risk management processes.
8 Industrial Development Corporation of South Africa Limited Leadership commentary Chief Executive Officer’s statement
The year under review was a particularly specific support to those clients in distress and developing challenging one, in which the South African solutions to ensure their sustainability. economy as well as the IDC Group remained Total disbursements for the year increased to R11.4 billion (2015: R10.9 billion). This is a measure of the financial capital under considerable strain on the back of adverse injected by the IDC into the economy for investment purposes. conditions both on domestic and external fronts. This is the second-highest annual level of disbursements after the record R16.0 billion reported in 2013. Our goal is to The global economy continued to face headwinds and struggled continue to reduce the turnaround time between approval to attain a higher growth momentum. World trade growth was and disbursements to ensure that timeous investment flows consequently muted, with key markets for South African exports, into the economy. such as China, recording lower demand for commodity products, and Europe for manufactured and processed goods. The largest beneficiaries of our funding approvals were the basic metals, metal products and mining industries, accounting for Locally, difficult operating conditions, including the effects of 45% of the total funding approved (R6.5 billion), thus countering the drought, weighed on the economy’s performance. These the adverse trends experienced by these critical segments of developments, in turn, negatively weighed in on the IDC Group’s the economy. performance and that of our business partners, particularly those operating in the manufacturing, mining and agricultural sectors. The chemicals and pharmaceuticals industries received 32% This further impacted both our pipeline and the quality of our (R4.7 billion) of the total funding approved, with other principal portfolio. In addition, we also observed an increase in the number beneficiaries being industrial infrastructure, 12% (R1.7 billion). Our of struggling clients – defined as clients in financial distress, high impact activities covering other manufacturing and tourism clients requesting a restructuring of their facilities with IDC and/ received 6.5% (R934 million) and this includes, among others or needing drought relief. This resulted in, for example, levels of Tourism (R222 million), Media and Motion Pictures, and tourism impairments increasing and clients’ requirements shifting more related activities (R149 million). Agro-processing and agriculture towards preserving jobs rather than expansions. received 4% (R614 million). More positively, the rest of Africa was the largest single regional The agricultural sector saw output drop by 8.4% in 2015, the market for South African manufactured exports in calendar year largest annual decline in agricultural production since 1995, due 2015, accounting for 41.3% of South Africa’s manufactured exports to the severe drought. To counter the impact of the drought, the to the world at large. Merchandise exports to other African IDC approved a R250 million facility to the Land Bank for drought markets collectively totalled R288.8 billion, of which approximately relief with the total facility to the Land Bank now standing at 86% (R247.1 billion) consisted of manufactured goods. This R479 million. had substantial spill-over effects throughout the South African R614 million was approved to the agro-processing industry, where economy due to strong inter-industry linkages. a sizeable investment of R203 million enabled an established, vertically integrated meat-processing business to extend its value PERFORMANCE HIGHLIGHTS chain from the livestock farmer in rural areas to a retail product In the year under review, the IDC implemented its new, proactive available to the end-consumer. We also invested in horticulture industrial development strategy, which is primarily focused on the and related processing, dairy processing, animal feed, food development of key value chains in the economy for enhanced products, beverages and aquaculture. competitiveness and growth. We also continued to play a critical counter-cyclical role in the economy, by providing funding to DISTRESSED FUNDING companies affected by the downturn, retaining production Of the R14.5 billion approved in the reporting period, R7.8 billion capacity and saving jobs in the process. was allocated to assist companies in distress as a result of cyclical The total value of approvals increased to R14.5 billion factors which included the aforementioned depressed market and (2015: R11.5 billion), the highest level ever, representing a adverse climatic conditions. In addition, restructurings of existing year-on-year increase of 26% despite the number of transactions facilities amounting to R2.9 billion were implemented. This approved decreasing by 14% to 180 (2015: 210). intervention will ensure that an estimated 9 480 jobs are saved and the industrial capacity is preserved. The major sectors which Approvals to the mining sector increased to R2.7 billion will benefit from this intervention are mining, agro-industries (2015: R2.5 billion). A major part of our focus was on providing and manufacturing.
2016 Integrated Report 9 1 OUR DEVELOPMENTAL ROLE MODEL
LEADERSHIP COMMENTARY (continued)
The IDC has significantly increased funding to women-owned enterprises. In the year under review the Corporation approved R1.2 billion in 35 transactions for women-empowered enterprises. Above, employees of K9, a 100% women-owned pet food manufacturer, packaging their products for delivery.
ECONOMIC EMPOWERMENT RESILIENT FINANCIAL PERFORMANCE IN The IDC is a key role player in the Black Industrialist Programme, CHALLENGING ECONOMIC CONDITIONS which aims to promote the participation of black entrepreneurs The Group reported a profit of R223 million (2015: R1.65 billion) as manufacturers in key sectors of the economy. I am particularly at the back of revenue of R19.4 billion (2015: R19.6 billion). pleased to report that we approved 58 transactions to the value Revenue from our subsidiary company, Scaw, declined by 10% to of R2.9 billion (2015: R2 billion) for 54 black industrialists over the R5.7 billion (2015: R6.3 billion) as a result of continued difficulties past year, resulting in the creation of 2 263 jobs. Furthermore, we in the steel industry. Foskor’s revenue, however, increased by 11% adjusted our pricing model to encourage access to affordable to R5.9 billion (2015: R5.3 billion) due to, among other factors, the funding to black industrialists. A total of R4.9 billion was approved effect of a favourable exchange rate. Turnaround strategies are for black-empowered companies. underway to bolster performance and ensure profitability in the We approved R1.2 billion in 35 transactions for women- future for both companies. empowered businesses, of which 10 transactions pertained to The value of our listed share portfolio declined over the the textiles, clothing and leather goods sector, and R421 million past year, to R40 billion (2015: R44.9 billion), mainly due to to producers of transport equipment. the continued adverse performance of the Corporation's Support to youth-empowered businesses improved significantly commodity-based investments. over the past year, with 19 transactions amounting to The current impairment charge for the Group rose sharply R970 million, approved for youth enterprises. Since the signing to R3.2 billion (2015: R1.5 billion) reflecting the challenging of the Youth Employment Accord, the IDC has provided funding trading conditions faced by many sectors. Considerable time to youth enterprises totaling R1.2 billion. We have also made and effort has gone towards implementing various impairment a concerted effort, over the past four years, to improve our interventions, targeted at strengthening our portfolio non-financial business support to youth-empowered business. management. Significant progress has been made with regard In addition, we made adjustments to our systems, processes to these interventions which are expected to reduce the and products to facilitate youth enterprise development. These impairment levels over the medium to long-term. include the Gro-E Youth Scheme, the recently introduced Youth Pipeline Development Programme, and a more robust and The increase in impairment levels is aligned with our risk responsive Business Support Programme. appetite and role in supporting high-risk sectors and businesses unattractive to commercial financiers. The trend also reflects ENHANCING SOCIO-ECONOMIC IMPACT our renewed focus on funding early-stage projects and start-up operations and our commitment to play a counter cyclical role Employment creation and preservation forms an integral in the economy. This approach will, however, not be to the part of our core developmental objectives. Over the past detriment of our financial sustainability. year, we facilitated the creation of 11 833 jobs and saved 3 439 jobs. To illustrate this commitment, our funding to the We continued with the implementation of cost-efficiency mining and quarrying sector facilitated the creation of an initiatives during the financial year and this resulted in operating additional 5 330 direct jobs and the saving of 1 000 jobs in expenses (excluding impairments) marginally increasing by 3% existing operations. The manufacturing sector will benefit to R4 540 million (2015: R4 422 million). Borrowings for the year with the creation of 4 416 jobs as a result of our interventions. increased to R28.0 billion (2015: R24.0 billion) to further support For example, Veer Steel Mills is expected to create 800 jobs our funding activities. with CRH Africa Automotive, creating 270 additional jobs.
10 Industrial Development Corporation of South Africa Limited LOOKING FORWARD I would like to extend my appreciation to Ms Katinka Schumann, Divisional Executive for High Impact and Regions, who served The IDC’s priorities are aligned with government’s policy the IDC for 22 years. Her contribution to the organisation direction and we continue to be committed to developing remains invaluable and impacted positively on the industries and diversifying South Africa’s industrial capacity, and, in the under her stewardship. I further extend my appreciation to Ms process, facilitating job creation, reducing inequality and Khumo Morolo, Divisional Executive for Agro, Infrastructure and contributing to economic transformation. In the past calendar New Industries for her service to the Corporation. Both these year, we celebrated 75 years of industrial development. This executives left the IDC at the end of April 2016. They have been anniversary provided an opportunity to reflect on the journey replaced by Mr William Smith, who assumed his new position as we have travelled, thus far, and more importantly, the journey Divisional Executive for High Impact and Regions and Ms Lizeka that lies ahead. The present levels of poverty, unemployment Matshekga, Divisional Executive for Agro, Infrastructure and New and inequality provide a stark reminder of the challenges Industries, at the beginning of May 2016. confronting our country and the IDC’s pivotal role within that. Industrialisation and infrastructure development hold the key to economic growth and transformation in South Africa and the ACKNOWLEDGEMENTS IDC’s role as a leading agent of industrial capacity development I would like to extend my deepest appreciation and gratitude to remains critical. the IDC Executive and employees for their unwavering support, diligence and hard work in what was undeniably a challenging In April 2015, we implemented Project Evolve, shifting our focus year for the Corporation, and to our clients for choosing us as to specific industry value chains and key sectors to provide their partners in development. the desired growth opportunities and development returns as we look for greater impact. Going forward, we will entrench Furthermore, I would also like to acknowledge, with much this revised focus on those sectors where we can achieve appreciation, the crucial role of the Chairperson and the Board targeted game-changing impacts, particularly in support of the of directors for their guidance and support during the year. expansion and/or modernisation of critical existing industries A special word of thanks goes to the Minister of Economic that can drive economic growth in South Africa and the rest Development and his team for ensuring that IDC continues of Africa. This includes investing in new industries that exhibit to play a central role in the economy and delivers against its significant growth and development potential. development mandate. Appreciation is also extended to all other government departments who, through their support Project Evolve not only prioritised industries for IDC’s proactive in various ways, have enabled us to execute our mandate, to involvement, but also identified several areas where operational the Department of Trade and Industry (dti) for their continued efficiencies could be further sharpened and improved as part confidence in the IDC and to National Treasury for supporting of driving efficiencies and effectiveness. Significant work was us in the improvement of our operating environment. The completed in the reporting period. During this period, we continued support of the other State-owned and controlled implemented a new corporate structure, redefined resource entities is also appreciated. In addition, I would like to extend requirements, improved our processes and made other my appreciation to the Honourable members of the Portfolio performance-related enhancements. The implementation and Committee on Economic Development for their continued monitoring of the outcomes from the different work streams support of the IDC and interest in its activities. continue as we entrench the value chain orientation we have adopted. Enhanced innovation and continuous improvement will remain at the centre of our strategy, maximising our impact on products and processes to achieve our objectives. Going forward, we are targeting the approval of R100 billion and the disbursement of R96 billion over the next five years. MG Qhena In line with our prioritisation strategy, value chains will receive Chief Executive Officer the largest portion of the capital allocation and approximately 23% of all new investments are expected to be in the industrial 30 June 2016 infrastructure space. We remain committed to increasing industrial development and contributing to the revival of the manufacturing sector and, as a result, this sector will receive 61% of the capital allocation over the said period. To maximise our impact, we will increasingly look for opportunities to leverage more funding from other financiers, thus ensuring that we crowd in more financial players. The IDC will continue to strive for inclusive growth, focusing on key development outcomes, in particular, jobs-rich industrialisation, support for government’s Black Industrialists Programme and women and youth entrepreneurial development.
MANAGEMENT CHANGES During the year, we announced two new executive appointments, Ms Nonkululeko Veleti, succeeding Mr Gert Gouws as the new Chief Financial Officer, effective from September 2015, and Ms Zama Luthuli as the new Divisional Executive for Corporate Affairs, effective from July 2015.
2016 Integrated Report 11 1 OUR DEVELOPMENTAL ROLE MODEL
LEADERSHIP
BOARD OF DIRECTORS
1 2 3
4 5 6
12 Industrial Development Corporation of South Africa Limited BA MABUZA (52) MG QHENA (50) LI BETHLEHEM (48) 1 Chairperson 2 Chief Executive Officer 3 (Non-executive Director) (Non-executive Director) (Executive Director) BA (Hons) (Industrial Sociology) (Wits), BA (Mathematics and Computer Science) BCompt (Hons) (UNISA), CA(SA), SEP (Wits and Master of Arts (Wits), Certificate in Economics (Hunter College, City University of NY), Harvard), Advanced Tax Certificate (UNISA) and Public Finance (UNISA) MBA (Finance and Information Systems) (Leonard Stern School of Business, NYU) Committees: • Chairperson of the Board Risk and Committees: Sustainability Committee • Member of the Board Human Capital • Member of the Board Investment and Nominations Committee Committee until 31 March 2016 • Member of the Board Investment Committee
RM GODSELL (63) SM MAGWENTSHU-RENSBURG (56) BA DAMES (50) 4 (Non-executive Director) 5 (Non-executive Director) 6 (Non-executive Director) BA (Sociology and Philosophy) (University of BA (Management Accounting and Business BSc (Hons) (Western Cape), MBA Natal), MA (Liberal Ethics) (University of Cape Administration) (Webster University, Vienna), (Samford University) Town), Postgraduate studies (Sociology and MBA (Webster University, London), Philosophy) (Leiden University) DPhil (Business Management) (UJ) Committees: Committees: • Chairperson of the Board Human Capital Committees: and Nominations Committee • Member of the Board Human Capital and • Chairperson of the Board Investment • Member of the Board Risk and Sustainability Nominations Committee Committee Committee • Member of the Board Audit Committee • Member of the Board Audit Committee
FOR MORE DETAILED INFORMATION ABOUT OUR LEADERSHIP, VISIT www.idc.co.za
2016 Integrated Report 13 1 OUR DEVELOPMENTAL ROLE MODEL
LEADERSHIP (continued)
BOARD OF DIRECTORS
7 8 9
10 11 12
13 14 15
14 Industrial Development Corporation of South Africa Limited NP MNXASANA (59) B MOLEFE (49) PM MTHETHWA (52) 7 (Non-executive Director) 8 (Non-executive Director) 9 (Non-executive Director) BCompt (Hons) (UNISA), CA(SA) BCom (UNISA), MBL (UNISA), Post Graduate BA (Economics) (University of the North), Diploma in Economics (University of London), MSc (Economics) (University of Paris), MBA Committees: Advanced Management Programme (Harvard (Corporate Finance) (University of Sheffield) • Chairperson of the Board Audit Business School), Programme for Young Global Committee Leaders (Kennedy School of Government, Committees: • Member of the Board Risk and Harvard University), Executive Programme • Member of the Board Investment Sustainability Committee (Wharton Business School) Committee • Member of the Board Investment • Member of the Board Risk and Committee from 1 April 2016 Committees: Sustainability Committee • Member of the Board Investment • Chairperson of the Governance and Ethics Committee Committee until 31 March 2016 • Member of the Board Audit Committee
ND ORLEYN (60) ZJ VAVI (53) NE ZALK (47) 10 (Non-executive Director) 11 (Non-executive Director) 12 (Non-executive Director) BProc, Bluris, LLB, Certificate in Energy BA (English and Private Law) (UNISA), Retired 29 February 2016 Law, Executive Management Programme Post-graduate Diploma in Economics (Kellogg Business School) Committees: (Development) (School of Oriental and African Studies), MSc (Economics) (with merit) • Member of the Board Human Capital Committees: (School of Oriental and African Studies, and Nominations Committee until • Member of the Board Investment London University) 29 February 2016 Committee • Member of the Social and Ethics • Member of the Board Human Capital and Committees: Committee until 29 February 2016 Nominations Committee • Member of the Board Investment • Member of the Board Risk and • Member of the Social and Ethics Committee Sustainability Committee until Committee • Member of the Social and Ethics 29 February 2016 • Chairperson of the Social and Ethics Committee Committee from 1 April 2016
GS GOUWS (57) A KRIEL (53) M MORE (35) 13 Divisional Executive: Transaction 14 (Non-executive Director) 15 (Non-executive Director) Support and Post-Investment BSocSci (UCT) BBBusSc (Finance Honours – CA option) (UCT), (Alternate Director to CEO) BCom (Accounting Honours) CTA (University BCom (Law), BCom (Hons) (UJ), CA(SA), FCMA, Committees: of Natal), CA(SA) Advanced Management Programme (Insead) • Member of the Board Risk and Sustainability Committee Committees: • Member of the Board Human Capital and • Member of the Board Audit Committee Nominations Committee • Member of the Social Ethics Committee
FOR MORE DETAILED INFORMATION ABOUT OUR LEADERSHIP, VISIT www.idc.co.za
2016 Integrated Report 15 1 OUR DEVELOPMENTAL ROLE MODEL
LEADERSHIP (continued)
EXECUTIVE MANAGEMENT
1 2 3
4 5 6
16 Industrial Development Corporation of South Africa Limited MG QHENA (50) N VELETI (42) MP MAINGANYA (43) 1 Chief Executive Officer 2 Chief Financial Officer 3 Chief Risk Officer BCompt (Hons) (UNISA), CA(SA), SEP (Wits BCom (Accounting) (Wits), Post Graduate BCom (Wits), BAcc (Wits), HDip Tax Law and Harvard), Advanced Tax Certificate Diploma in Accounting (UKZN), CA(SA) (RAU), Adv. Cert. Banking (UJ), IEDP (Wits), (UNISA) GEDP (GIBS), CA(SA) Appointed to executive management on 1 September 2015
4 GS GOUWS (57) 5 RJ GAVENI (44) 6 AP MALINGA (51) Divisional Executive: Transaction Divisional Executive: Human Capital Divisional Executive: Mining and Support and Post-Investment BAdmin (Hons) (Industrial Psychology) Metals Industries BCom (Law), BCom (Hons) (UJ), CA(SA), (UNISA), Masters in HR Management Mining and Manufacturing Industries (Golden Gate University, USA), Executive FCMA, Advanced Management Programme BSc (Geology) (UCT), MBL (UNISA) (Insead) Development Programme (GIBS)
FOR MORE DETAILED INFORMATION ABOUT OUR LEADERSHIP, VISIT www.idc.co.za
2016 Integrated Report 17 1 OUR DEVELOPMENTAL ROLE MODEL
LEADERSHIP (continued)
EXECUTIVE MANAGEMENT
7 8 99
10 11 612
13 14
18 Industrial Development Corporation of South Africa Limited P MAKWANE (50) PZ LUTHULI (39) DA JARVIS (46) 7 General Counsel and Group Company 8 Divisional Executive: 9 Divisional Executive: Corporate Secretary Corporate Affairs Strategy BA Communication (UZ), MBA (UNISA) BSocSci (UND), BSocSci (Hons) (UND), BIuris, LLB (Western Cape) MSocSci (UND) Appointed to executive management on 1 July 2015
SAU MEER (54) KC MOROLO (52) K SCHUMANN (47) 10 Divisional Executive: Chemicals and 11 Divisional Executive: Agro, 12 Divisional Executive: High Impact and Textiles Industries Infrastructure and New Industries Regions BSc (Mechanical Engineering) (University BScEng (Mechanical Engineering) (Wits), B Home Economics, MBA (USB), Advanced of Natal), MBL (UNISA), Advanced MEng (Engineering Management) Management Programme (Insead) Management Programme (Insead), Executive (University of Pretoria), Board Leadership Development Programme (GIBS) Programme (GIBS) End of contract 30 April 2016 Resigned 30 April 2016
WH SMITH (55) L MATSHEKGA (42) 13 Divisional Executive: High Impact and 14 Divisional Executive: Agro, Regions Infrastructure and New Industries Pr Eng, B Eng (Civil) (University of BCom General (UWC), BCom Hons Financial Stellenbosch), GDE (Civil) (Wits) Analysis and Portfolio Management (UCT), Masters in Development Finance (USB), Appointed to executive management on Global Executive Development Programme 1 May 2016 (GIBS)
Appointed to executive management on 1 May 2016
FOR MORE DETAILED INFORMATION ABOUT OUR LEADERSHIP, VISIT www.idc.co.za
2016 Integrated Report 19 1 OUR DEVELOPMENTAL ROLE MODEL
OBJECTIVE AND OUTCOMES VALUES Objective: Lead industrial capacity development The IDC’s day-to-day activities and business conduct are guided by our values: Outcomes: Facilitation of decent sustainable direct and indirect employment Increase development in poorer areas and ensure higher integration of regional economies Promotion of entrepreneurship and small and medium enterprise (SME) growth PASSION Advancement of environmentally sustainable growth Growth in sector diversity and increase localised PARTNERSHIP PROFESSIONALISM production Support for the transformation of communities Development of black industrialists and support for women and youth entrepreneurs
GROUP STRUCTURE
The following diagram illustrates the IDC Group IDC is a development finance institution (DFI). In some structure*. As reflected in the notes to the Annual instances the Corporation may take control of other Financial Statements, the IDC financing subsidiaries business enterprises through equity investments are Findevco, Impofin, Konoil and the Small Enterprise related to early-stage project investment, turnarounds Finance Agency (sefa). of existing businesses, or for reasons strategic to the development of an industry.
Industrial Development Corporation of South Africa Limited
Phosphate mining and 59% Foskor (Pty) Ltd fertiliser production
Steel manufacturing and Scaw South Africa (Pty) Ltd 74% production of steel products
Development finance for Small Enterprise Finance Agency SOC Ltd 100% survivalist, micro, small and medium enterprise
Thelo Rolling Stock Leasing (Pty) Ltd 50% Rolling stock leasing
Prilla (Pty) Ltd 100% Yarn manufacturer
Manufacturing of wire Consolidated Wire Industries (Pty) Ltd 50% and wire products
Operational subsidiaries with assets exceeding R250 million shown. * A more comprehensive list of subsidiaries is included in the notes to the financial statements.
20 Industrial Development Corporation of South Africa Limited OPERATIONAL STRUCTURE
CHIEF EXECUTIVE OFFICER
OPERATIONAL SUPPORT DIRECT DIVISIONS DIVISIONS REPORTS
Agro, Infrastructure, Finance and Funding Corporate Strategy Internal Audit and New Industries
Mining and Metal Industries Corporate Risk Human Capital
Chemicals and Textiles Transaction Support Corporate Secretariat Industries and Post-Investment and Legal
High Impact and Regions Corporate Affairs
OPERATIONAL FOOTPRINT
The IDC maintains offices in all nine provinces. Business activities in the rest of Africa are serviced from our head office in South Africa. Limpopo Thohoyandou
Polokwane Tzaneen
Brits Rustenburg Mbombela Mahikeng eMalahleni North West Gauteng Secunda Klerksdorp Mpumalanga Vryburg
Phuthaditjhaba KwaZulu-Natal Upington Welkom
Kimberley Free State
Bloemfontein Richards Bay Pietermaritzburg Northern Cape Durban
Mthatha Regional offices Eastern Cape
East London Satellite offices Western Cape Port Elizabeth Cape Town George Head office
2016 Integrated Report 21 1 OUR DEVELOPMENTAL ROLE MODEL
VISION AND MISSION
VISION MISSION
To be the primary driving force of commercially The Industrial Development Corporation is a national sustainable industrial development and development finance institution whose primary innovation for the benefit of South Africa and objectives are to contribute to the generation of the rest of Africa. balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles.
OUR STRATEGY
The IDC’s strategy is focused on the need to Strategy development in the IDC is an ongoing maximise development impact through jobs- process with a formal annual review. These rich industrialisation and ensuring the long-term reviews take into account changes in the operating sustainability of the Corporation by addressing environment and are guided by robust discussions specific issues related to financial capital, our human by the Board, executive management and resources, stakeholders, the natural environment other senior management of the IDC. Strategies and increasing the efficient use of resources. targeting specific industries and functional areas are developed with inputs from experts in their respective fields throughout the Corporation.
STRATEGY PILLARS
ENSURING LONG-TERM SUSTAINABILITY
INCREASING INDUSTRIAL HUMAN, SOCIAL, NATURAL AND FINANCIAL CAPITAL DEVELOPMENT MANUFACTURING CAPITAL
Priority sector strategies where the IDC Implement measures to manage Human resources plays a proactive role concentration risk in the IDC portfolio • Ensure appropriately skilled and capacitated human resources Strengthen IDC’s development objectives Plan investment returns and risk profile • Entrench a culture of performance and and strategies to ensure sufficient growth to replace development existing cash generators Identify and develop new industries that Stakeholders can be drivers for growth and employment • Improve customer service Structure investments to increase direct in the future • Partner with other financiers to leverage equity returns Support infrastructure projects that unlock different strengths and mandates • Increase engagement with sector players industrial development Manage risk through appropriate to identify opportunities investments, pricing and portfolio Align the IDC with the NDP, NGP, IPAP, APAP • Develop black industrialists management and NIP sector development objectives • Strengthen IDC expertise to contribute to policy Increase the number of projects under • Build strong communities around IDC- development and in implementation funded projects Provide industrial finance to achieve sector Natural environment development objectives • Improve IDC’s and industry's Increase regional industrial integration by environmental sustainability developing value chains Utilisation of resources Ensure sefa operates effectively and • Enhance efficiency through improved efficiently systems
22 Industrial Development Corporation of South Africa Limited CASE STUDY SACKS PACKAGING
Sacks Packaging is a 100% black-owned company that manufactures multi-wall sacks, paper bags, self-opening bags and high-gloss bags for sale to the sugar, agricultural, cement and other industries. The company’s operations are based in Mobeni, KwaZulu-Natal.
The IDC supported Sacks Packaging in acquiring 100% In addition to providing funding for the deal, the IDC of Nampak Sacks – a division of Nampak Products facilitated the change of the previously internationally Limited (Nampak), a JSE listed company, and as part held ownership to a locally based black consortium of the sale agreement Nampak sold their paper – a transaction which also helped to save 238 jobs – sack division as a going concern to a black-owned and approved funding to allow Sacks Packaging to consortium. purchase a previously leased property critical to the company’s operational requirements. The IDC also provided a guarantee facility that will be used by this business partner to meet growing demand. Through this transaction, the IDC and Nampak have demonstrated their commitment to the development of black industrialists and the transformation of the paper packaging sector.
IDC funding enabled a consortium of black industrialists to acquire 100% of Nampak Sacks – a division of JSE listed Nampak products. Above, employees sort paper packages at the company’s plant in Mobeni, Durban.
2016 Integrated Report 23 1 OUR DEVELOPMENTAL ROLE MODEL
PROJECT EVOLVE
In 2015, we embarked on a project to prioritise industries so as to ensure we increase our effectiveness and maximise our impact on the economy. The priority industries were selected based on strength from innovation, science and technology SA’s current and long-term growth potential, our are important. Another priority area aims to address ability to have a meaningful impact, and alignment the negative impact that the infrastructure backlog to government priorities. Three value chains were has on the development of industry. We are targeting identified where our proactive support could have infrastructure projects that can unlock industrial the largest impact on direct and indirect job creation development. through increased competitiveness, developing The project also identified opportunities to increase downstream industries and higher levels of exports the IDC’s operational efficiencies and effectiveness. – especially into markets in the rest of Africa. In addition, we are assuming a greater role to proactively The prioritisation component of the project resulted nurture and develop industries that might not in a differentiated approach to developing industries. currently play a significant part in the South African This approach is shown in the table overleaf and economy, but have the potential for growth in the formed the basis for a restructuring of operations and future. In particular, new sectors that derive their a review and redesign of internal processes.
Some of the IDC staff pose for a commemorative photo in Sandton, Johannesburg.
24 Industrial Industrial Development Development Corporation Corporation of of South South Africa Africa Limited Limited IDC’S DIFFERENTIATED APPROACH TO SECTOR DEVELOPMENT
VALUE NEW SPECIAL HIGH HIGH IMPACT INDUSTRIAL CHAINS INDUSTRIES IMPACT SECTORS SECTORS INFRASTRUCTURE
Existing sectors with the Sectors which are Sectors that do not Sectors within the IDC Infrastructure that largest opportunities determined by forward- meet the criteria for mandate that offer a high unlocks industrial within the economy looking trends and value chains. However volume of opportunities, development: and a high propensity innovation, and could their particular place contribute to the IDC • Electricity for jobs-rich industrial develop into significant of importance within development goals, but • Water development in the opportunities for SA the South African where the IDC does not • Telecommunications
DEFINITION short and medium term. economy, and the foresee a proactive role • Logistics These are connected current role played chains of industries by the IDC, suggests where the IDC will take that the Corporation leadership for industrial should continue to play capacity development. a strategic role in these · Metals, metal products, industries: machinery and · Media and motion equipment, transport pictures equipment and mining · Clothing, textiles, · Chemicals, plastics and footwear and leather pharmaceuticals products · Agro-processing and agriculture
Proactive industry · New industries are · Identified by exception · Fund a high volume of Unlock industrial development by: nascent industries · May require sector applications offering development outcome · Developing and or technologies that strategies and high-impact return through or by: implementing the IDC will nurture specialist skills on effort · Playing a coordination strategies to achieve to become sizeable, · Drive achievement · Create jobs and deliver role to ensure that industry development relevant industries of of development against the IDC’s requisite infrastructure APPROACH goals that in turn guide the future outcomes other developmental is funded and strategies for industries · The IDC will do regular outcomes in developed by · Playing a proactive role reviews to identify new sectors outside the other funders to identify, develop and potential stars and value chains · Supporting private fund opportunities in those which should · Limited sector skills sector or Public Private support of strategies graduate or exit · Drive achievement Partnerships (PPP) · In addition, we also · The IDC will be of development industrial infrastructure reactively fund involved in early-stage outcomes where it is necessary applications from sector and technology · Investing selectively entrepreneurs falling development as well as in strategic, economy- within the value chains enabling environments wide, large-scale · Taking advantage of · There is expected to interventions economic linkages be a range of activities between sectors at various stages of · Playing an active role in development and influencing policies to levels of risk enhance development · Drive achievement of the industries of development · Drive achievement outcomes of development outcomes
2016 Integrated Report 25 1 OUR DEVELOPMENTAL ROLE MODEL
MATERIALITY
The IDC’s definition of materiality with regard to integrated The process of determining materiality, in the context of reporting, and the process followed for determining integrated reporting, continues with consultations with internal material issues, take into account the published guidelines and external stakeholders. In addition to engagements with of the International Integrated Reporting Council (IIRC), the stakeholders and leadership, we conduct research into industry International Federation of Accountants (IFAC) and the Global best practice and peer reporting themes and practices. Finally, Reporting Initiative (GRI). we undertake a validation exercise to ensure that the outcomes of our process comply with the requirements of integrated A matter is considered to be relevant if it is very important reporting frameworks. to appropriate stakeholders, relates to critical risks facing the organisation, or forms an integral part of our strategy. If these The 11 material issues identified in 2013 were merged into five relevant matters can also substantially impact the Corporation’s during the last reporting period and these will be revisited ability to create financial value and deliver development returns during each reporting cycle to test their continued relevance. over time, as captured in the IDC’s mission, they are then also considered to be material to the IDC (refer to page 22).
IDC’s material issues
EXTERNAL INTERNAL
Stakeholders Strategy Key risks Stakeholders are prioritised Board Strategy and business Top risks are identified and evaluated in terms according to their potential planning sessions highlight of magnitude and likelihood. Issues that could influence and their expectations strategic priorities. These substantially affect value creation are identified and are documented. (See reference on strategic prioririties are linked to strategy, governance, performance and pages 47 to 53.) They expect the predicated on IDC’s Strategy prospects. (See reference on key risks on pages 61 following from the IDC: Pillars, which are shown on to 62.) These include: • Industrial development funding page 22, and summarised below: • Business continuity and impact • Increasing industrial • Macro-economic conditions • Socio-economic impact development • Shareholder confidence • Good governance • Ensuring long-term • Insufficient participation by black industrialists in the • Financial sustainability sustainable financial capital economy • Legal and regulatory compliance • Relevant products and • Ensuring long-term appropriate pricing sustainable human, social, • Volatility in listed share portfolio natural and manufacturing • Customer service levels • Maturity of IDC’s risk management architecture capital • Electricity supply • Skilled human resource pool • Carbon taxes to be paid by IDC’s subsidiaries and • Stakeholder engagement associates • Community development • Credit risk • Policy research and inputs • Industrial action • Environmentally sustainable • Dependence on an enabling environment development
Top risks and strategic priorities were mapped to the material issues of stakeholders. The most significant issues that emerged from the three perspectives were then grouped.
IDC’s Material Matters • Impacting on industrial development Aligning IDC’s activities with the sector objectives of the NGP, IPAP, APAP and NIP • Contributing to socio-economic development Improving socio-economic impact including job creation, regional investment patterns in SA, black economic empowerment and black industrialists, and influencing environmentally sustainable development • Building strong partnerships Increasing stakeholder engagement to communicate plans, successes, and fostering cooperation between role players • Committed to good governance Maintaining good governance including risk assessment and fraud prevention processes • Impact on financial sustainability Continuing to be a financially sustainable organisation through appropriate pricing, reducing impairments and portfolio management
26 Industrial Development Corporation of South Africa Limited OUR BUSINESS MODEL
The industries in which IDC is involved are shown in the section INDUSTRY DEVELOPMENT STRATEGIES relating to strategy on pages 22 to 26.
The proactive development of industries will involve identifying and developing projects to address specific opportunities or weaknesses in value chains.
ASSESSMENT We strive to be at the centre of industrial development activities PROJECT ENABLING OF FUNDING and achieve this by interacting with different stakeholders. These DEVELOPMENT ENVIRONMENT APPLICATIONS can include private sector players, which include potential local and international partners for projects that we are funding. It also includes interaction with government to provide inputs into policy development that will strengthen the enabling environment for industry development.
In addition to proactive industry development, we also provide funding for entrepreneurs who approach us and apply for finance for their businesses. These applications undergo a full assessment to determine the viability of the business plan, with our decision to provide funding being more dependent on the future potential of a business than the history of that business.
Apart from assessments of the commercial viability of businesses, we also take into account the development outcomes (see page 20) that would be achieved by funding the business.
We assess applications covering all stages of business maturity.
As a DFI, the core of our activities relates to the financing of viable projects and businesses. FUNDING PROJECT FUNDING We use a range of financial instruments to provide finance. These OF include the extension of loans, equity investments and issuing of APPLICATIONS guarantees. Transactions, including repayment terms, are structured to suit a business’ needs and cash flow expectations.
We access the capital needed to provide funding by borrowing from other DFIs, commercial banks, and issuing bonds. Exits from mature investments where our equity investments have resulted in capital growth are also used to fund new loans. Interest received from loans and dividends from equity investments are used to cover our costs with profits reinvested into the economy.
We also manage some funds on behalf of government and can use these funds to finance businesses that are aligned to the fund’s objectives.
After we provide funding, a business’ performance is closely POST-INVESTMENT MANAGEMENT monitored to ensure continued sustainability and assistance is provided where problems arise.
Some of these interventions include financial support such as the restructuring of facilities (e.g. converting debt to equity), and non-financial support such as the appointment of skilled individuals to address specific shortcomings in the business.
2016 Integrated Report 27 PERFORMANCE 2 AND IMPACT 29 Impacting on industrial development 54 Committed to good governance 40 Contributing to socio-economic development 64 Impact on financial sustainability 47 Building strong partnerships
CASE STUDY VEER STEEL
The South African steel industry is highly concentrated and dominated by a few high-cost producers, resulting in high local steel prices to downstream users and hampering growth and job creation in the downstream steel industry.
In light of this challenge, the IDC’s strategy seeks to optimise the use of locally available raw materials to lower input costs and to provide steel at a lower cost at the required quality and grades. The ultimate objective is to promote downstream beneficiation and fabrication industries. A beneficiary of this strategy is Veer Steel which manufactures various sizes of steel bars used in the construction industry and in the fabrication of steel items such as gates, doors and windows. Just like other mini mills spread across the country, Veer has demonstrated the potential to produce steel efficiently with low overheads thus being able to transfer these low-cost products to downstream industries, and in the process creating substantial job opportunities. The upside is that Veer has been able to compete in a tough economic climate unlike major players that are battling to offset the impact of cheap steel imports. In fact, it has been one of the few companies that has been able to compete favourably and profitably despite the harsh economic environment. Demand for its products has been consistent and the company now intends to expand its capacity so it can better serve its growing consumer base with quality steel at affordable prices. IDC funding is expected to facilitate the creation of approximately 800 jobs.
28 Industrial Development Corporation of South Africa Limited IMPACTING ON INDUSTRIAL DEVELOPMENT
The South African economy remained strained Number of approvals per year to in 2015 due to subdued demand domestically
and globally, coupled with persistent supply-side challenges. This resulted in economic growth slowing to 1.3%, the lowest rate since the 2008 recession, with the weakness widespread across the economy. It is in such conditions that the counter-cyclical role of the IDC comes to the fore. At the same time that the IDC was implementing a new, proactive industrial development strategy, to pre-empt the potential negative impact that these conditions
could have on industrial capacity, we reintroduced funding to distressed companies during the year. This funding is aimed at saving jobs at companies that are facing difficulties due to the tough economic conditions.
LA The approvals of R14.5 billion (2015: R11.5 billion), recorded in the
2016 financial year, are the highest level the IDC has ever achieved. This represents a year-on-year increase of 26%. A further five transactions, of which four are renewable energy projects and one a coal-fired power project, and together totalling R6.1 billion, were processed during the 2016 financial year, but as the bidding process for these transactions had not been completed, they have not been included in the value of approvals for 2016. Over the Disbursement levels increased from R10.9 billion in 2015 to five-year period ended 31 March 2016, the IDC’s approved funding R11.4 billion for 2016. For the five-year period ended 31 March reached R66.3 billion, 53% higher than the funding approved 2016, disbursements rose to R57.8 billion from R26.0 billion for during the preceding five years. the period 2007 to 2011 representing nominal growth of 122%. The number of transactions approved decreased by 14% from 210 in 2015 to 180 for the 2016 financial year. Disbursements per year to (R’billion)
Value of financing approvals per year to (R’billion)
2016 Integrated Report 29 2 PERFORMANCE AND IMPACT
IMPACTING ON INDUSTRIAL DEVELOPMENT (continued)
For the year ended 31 March chain, including in primary activities such as mining, our ultimate objective is to support the downstream industry to 2016 2015 2014 beneficiate and add value to South African mineral resources. Value of funding transactions R1.5 billion of the approvals were in support of basic iron and approved (R’billion) LA 14.5 11.5 13.8 steel facilities. This included ongoing support for Scaw Metals Number of funding transactions as well as funding that was approved for Evraz Highveld Steel approved 180 210 196 and Vanadium in an attempt to assist the company with a turnaround strategy. Unfortunately, the company has ceased Of the R14.5 billion, R6.5 billion was approved for businesses operations and jobs could not be saved, although we are still operating in the manufacturing of metal products and mining working closely with the company’s business rescue practitioner (45% of total), R4.7 billion (32%) for entities operating in the to find a solution for the company. chemicals and pharmaceutical space and R1.7 billion (11%) for industrial infrastructure projects. The remaining R1.6 billion R241 million was approved for a steel mill in Gauteng to ramp was approved for businesses operating in agro-processing up the production of its steel bar manufacturing capacity and agriculture (R614 million) and the High Impact and New by 144 000 tonnes per annum. To assist the entry of black Industries (R980 million) areas. industrialists in the downstream industry, R137 million was approved for the acquisition of a large bore-spiral pipe Funding approvals and disbursements per value chain manufacturing operation. (R’million) Three companies had their funding approved for the manufacture of engineered medium-steel products, pressure vessels and gas cylinders. Total funding for the three amounted
to R270 million and, as these are labour-intensive processes, the funding is expected to create some 1 397 job opportunities.
R550 million was funded in support of Bell Equipment to bolster their efforts to export to North American markets. Bell Equipment is a South African company with 60 years’ experience in the manufacture and distribution of materials-handling equipment. We have built a strong partnership with Bell over a number of years and are supporting their growth strategy. Three transactions were approved for funding in the basic metals environment – R250 million and R600 million for platinum and copper respectively, and another for care and maintenance activities to preserve assets in the chrome mining sector.
Agro-processing High impact Industrial Chemicals Metal products The automotive and transport equipment industry was and and infrastructure and and agriculture new industries pharmaceuticals mining supported with funding approvals totaling R959 million, of which R145 million was approved for a new laser blanking line to Approvals Disbursements promote the localisation of blanking services in the automotive sector. R195 million was approved for the manufacture of rolling stock and the localisation of train wheel forging in South Africa, METAL PRODUCTS AND MINING with R74 million approved for new plant and equipment for the Throughout the year under review, manufacturing activity manufacture of components and the supply of services to the remained constrained by weak demand conditions, both locally automotive industry, as part of the IDC’s import replacement and in key export markets, as well as by rising operational costs strategy and to facilitate linkages to the government’s industrial and infrastructure-related challenges, including poor security of infrastructure programme. electricity supply. The interplay of these challenges reflected in In further efforts to improve transport infrastructure, R170 million the fall in business confidence in the first quarter of the calendar was approved for an innovative system to transport 100 000 year 2016. The metal products and mining industries contributed tonnes of chrome ore per month via an aerial ropeway and 11.5% towards South Africa’s GDP in 2014 and their employment bucket system. Previously, it was transported by road. accounted for 9.3% of all formal non-agricultural employment Advanced manufacturing also received a capital injection with in Q4 2015. The importance of this value chain in South Africa’s funding approved for two aviation companies. The first received economy is one of the main reasons why it was selected as an area R50 million and will acquire the right to use intellectual property for the IDC to focus its proactive industry development efforts. to set up a manufacturing plant locally, while the second, with The IDC’s strategies in this value chain focus on creating R141 million, will be setting up a new plant to manufacture a competitive downstream industries, such as machinery and South African-developed patrol aircraft. transport equipment, supported by inputs from the basic Trading and operational conditions remained extremely metals and mining industries. In addition, the mining industry challenging in the mining sector. Very low commodity prices has linkages to several other downstream manufacturing and faltering growth in volume demand, particularly from industries and can have a positive impact on the development China, continued to weigh heavily on the sector’s performance. of communities if approached in a more sustainable way. However, the Rand’s weakness provided a degree of cushioning To that end, the largest portion of funding approved, 45%, to local producers on the income side, while the expenditure side was for basic metals, metal products and mining. Although benefited from the impact of low oil prices on operating costs. we support companies operating throughout this value
30 Industrial Development Corporation of South Africa Limited CASE STUDY PALABORA COPPER
One of the key objectives of the IDC is to maintain and increase industrial capacity by proactively supporting the modernisation of production facilities. The investment in Palabora Copper seeks to achieve precisely this objective. The technology powering the smelter complex at Palabora will replace the current furnace with a double-sided blown Copper was installed in 1956, long before the introduction of furnace for smelting copper concentrate and modifying the Air Quality Act, leaving the smelting technology currently material charging and the off gas systems as well as the in use environmentally unfriendly. acid plant. The IDC funding is therefore aimed at rehabilitating and This investment will prevent possible decommissioning retrofitting the company’s smelter complex, with the of the smelting complex with the result that the local objective of ensuring that existing copper rod production beneficiation of copper concentrate will continue. in the country is maintained, and thereby assisting in halting Retrofitting the smelter with new technology will thus the de-industrialisation of the economy. The retrofitting not only sustain Palabora Copper’s operations, but will also enable the company to meet industry-accepted emission standards. An important outcome of the IDC investment will be the saving of 1 000 jobs including those of contractor workers, and with the sustaining of operations in the company’s manufacturing plants, the South African copper wire industry will not find it necessary to import copper rods. Most importantly, however, the facility will continue to contribute to the social and economic stability of the local community in which it operates.
IDC’s support to Palabora Copper will not only help to boost SA’s copper production capacity, but will also save 1 000 jobs that could have been shed as a result of the company closing its old smelting plant.
2016 Integrated Report 31 2 PERFORMANCE AND IMPACT
IMPACTING ON INDUSTRIAL DEVELOPMENT (continued)
Following low productivity in 2014, signs of recovery were evident coal mining sub-sector. One of the large South African-based in 2015. Mining production rebounded as a result of strong resources groups required restructuring of its existing facilities recovery in terms of a 46% rise in the outputs of the platinum as well as additional funding of R1.5 billion to assist in increasing group metals (PGMs) segment. This translated in the overall the current capacity of their three mines by 14.6 million tonnes mining output expanding by 3.3%. Manganese and chrome per annum. An emerging mining company in Mpumalanga, with ore outputs also increased strongly. In contrast, there was a a plan to recover saleable coal from the Van Dijksdrif coal discard contraction in output volumes in a number of other mining dump, received funding support of R215 million. The recovered sub-sectors, including iron ore, gold, coal, copper and other coal will benefit, among others, Eskom and the City of Tshwane metallic minerals. Fixed investment contracted in real terms and in alleviating coal supply constraints. the mining sector reported substantial job losses during the year. The remaining 6% approved in the mining sector, approximately As a result, part of our efforts and focus for the 2016 financial R170 million, went towards the development of a new bulk year centred on assisting those clients in distress and developing tailing re-treatment plant to recover both metallurgical and solutions to alleviate their situations. Consequently, funding chemical grade chrome ore concentrates from waste streams approvals for the year increased from R2.5 billion in 2015 to generated by platinum producers. R2.7 billion in 2016, representing an 8.8% increase. Disbursements to eight mining companies amounted to nearly In line with the IDC strategy to support the thermal coal R1.3 billion, with 67% of this value, R852 million, being disbursed industry as an important component of South Africa’s energy for basic metal mining companies in manganese and chrome, industry, 62% of approvals for the mining sector went into the R308 million for coal and R94 million for diamond mining.
Funding approvals and disbursements in the mining and metals industries value chain (R’miliion)
* Manganese mining Machinery and Motor vehicles and Other mining Mining of coal and lignite Basic metals and equipment, including other transport metal products electrical machinery equipment
Approvals Disbursements
* There were no approvals in the financial year
CHEMICALS AND PHARMACEUTICALS is much larger, at an estimated R23 billion in retail sales, when The petroleum, chemicals, pharmaceuticals and downstream calculated to include imported finished products. However, plastics industries contributed 3.2% to the South African the local personal and home care contract manufacturing economy in 2014 and employed just over 140 000 people in the industry, which manufactures face wash, toothpaste, perfume final quarter of 2015. In this value chain, the IDC aims to improve and detergents, is facing difficulties. To that end, funding of the global competitiveness of the sectors, with basic chemicals R158 million for a key player in the value chain was approved industries playing an important role in the development of to ensure adequate support and the development of the other downstream manufacturing industries. In downstream value chain. chemicals industries, the IDC’s focus is on the development of A working capital facility of R16.1 million was approved for the the pharmaceuticals and other consumer products sectors. expansion of an automotive lubricants manufacturing plant. Of the R4.7 billion approved in these sectors, 85% was for the South Africa is a net importer of lubricant finished goods and fertiliser sector to maintain and upgrade existing capacity at our boosting local manufacture will ease reliance on imports. subsidiary, Foskor. An entity that supplies gas to hospitals received R71 million in The South African home and personal care industry accounts for support. We continued to implement our strategy of supporting an estimated 1.4% of manufacturing output and R3.4 billion in the radio-pharmaceuticals industry, with R175 million approved annual sales, employing about 31 000 people of whom 10 000 towards the commercial production of Molybdenum-100 are directly employed in the manufacturing value chain. The isotopes, and R40 million for an innovative technology in the opportunity for import replacement is significant as the industry production of “green” biocides, which kill infectious and harmful organisms such as bacteria, fungi, viruses and microbes.
32 Industrial Development Corporation of South Africa Limited Funding approvals and disbursements in the chemicals and pharmaceuticals value chain (R’million)
* Pesticides and Other Plastic Basic Soap, detergents, Pharmaceuticals, Fertilisers and other agro-chemical chemical products chemicals perfumes medical chemicals, nitrogen products products and toilet preparations botanical products compounds
Approvals Disbursements
* There were no disbursements made in the financial year
CASE STUDY MOLYBDOS
The IDC partnered with technology supplier Klydon (Pty) This is a Fourth Industrial Revolution development that Ltd and Maono Molybdos (Pty) Ltd to establish a highly will transform the global industry. It will solve numerous advanced molybdenum isotope separation plant, currently problems being encountered by the existing nuclear under construction. reactor-based route to produce radiotracers. Nuclear medicine is undeveloped in the developing world, largely The molybdenum isotope product will be used to produce because of the high cost and unavailability of radio- a technetium radiotracer for medical imaging, mostly used pharmaceuticals, and this initiative is ideally placed to for cardiovascular applications, and to detect cancer and address these challenges. infection. Technetium scanning is used for more than 80% of all nuclear medical imaging world wide.
The molybdenum isotope product will be used to produce a technetium radiotracer for medical imaging.
2016 Integrated Report 33 2 PERFORMANCE AND IMPACT
IMPACTING ON INDUSTRIAL DEVELOPMENT (continued)
AGRO-PROCESSING AND AGRICULTURE Funding approvals and disbursements in the agro-processing Agro-processing and agriculture remains one and agriculture value chain (R’million) of the largest employers in the country with 1.3 million people employed in the formal and informal sectors, as at the end of 2015. IDC’s focus on agro-processing is designed to stimulate demand for primary agricultural products and, in doing so, develop rural areas and increase employment levels.
Having faced the worst drought in more than a century, the agricultural sector saw output declining by 8.4% in 2015, the largest annual fall in agricultural production since 1995. The impact of such adverse developments in this important sector of the economy was felt by numerous suppliers of goods and services, with downstream producers also affected, and the sugar cane, maize and wheat-producing segments the hardest hit. The severity of the drought took a particularly heavy toll on rural communities and the country’s poor due to cutbacks in Fishing, operating Food and Agriculture of fish hatcheries beverages farming employment coupled with surging food prices. and farms
The food and beverage sector’s manufacturing output declined Approvals Disbursements by 1.5% year-on-year, primarily in the meat, fish, fruit, dairy and beverages sub-sectors. This is indicative of softening consumer demand in the face of rising food prices and reduced disposable income. This impacted on the IDC's activity in INDUSTRIAL INFRASTRUCTURE the industry and the Corporation approved 19 transactions The IDC’s activities in the infrastructure sector are aimed at those totaling R614 million, including R250 million to the Land and projects that enable the Corporation’s priority value chains and Agricultural Development Bank of South Africa, towards drought new industries and also, more broadly, to unlock the country’s relief. We provided a sugar mill in KwaZulu-Natal with support industrial development potential. through funding of R14 million to its outgrowers to plant about 700 hectares of new and fallow sugar cane fields, thereby The 2016 financial year saw further investments supporting the contributing to the sustainability of the mill. A R22 million Renewable Energy Independent Power Producers Procurement drought facility was also approved for the mill. Programme (REIPPPP), with three approvals for smaller 5MW Photovoltaic PV solar installations. Funding for these smaller Due to its labour-intensive nature, IDC aims to increase installations totalled R178 million. The energy constraints faced production in horticulture as a means of increasing jobs. We will by the country gave impetus to a multitude of solutions being achieve this through transactions such as the one supporting explored to maintain operational efficiencies. Such solutions the expansion of soft citrus (mandarin) farming operations include funding of R257 million for a waste heat recovery plant by 556 hectares, near Ashton in the Western Cape. We also in Kimberley to co-generate 6MW of electricity, set to replace supported citrus farming in the Northern Cape through a 30% of the manufacturing plant’s energy requirements. A further R22 million approval to an existing investment to enable it to R101 million was provided for the installation of a 1.8MW fuel cell maintain operational efficiencies. at a platinum refinery, and R3 million apiece was apportioned for In addition, we funded two entities involved in the cultivation of a 105kW combined heat power plant and an anaerobic digester blueberries in Tzaneen, Limpopo and Stutterheim, Eastern Cape, to harvest methane gas from manure. and provided funding for the growing of pecan nuts in the Continued support for larger-scale projects included the Northern Cape. The establishment of manufacturing facilities acquisition of shares whereby a broad-based black youth-owned for the supply of various processed cheese substitutes to food company acquired a 10% stake, at R360 million, in a 100MW manufacturers, the food service industry and pizza companies thermal concentrated solar plant. was supported with R20 million in IDC funding. Other entities supported with funding relate to agro-processing, forestry and Fuel storage facilities in the Eastern Cape were funded with marine aquaculture. R96.9 million and will enable, at capacity, the on-selling of 63 million litres of fuel per day, while a coal export terminal with an over-riding objective of unlocking opportunities for the export market to the junior coal mining sector received approval for R115 million. The need to support infrastructure development in the rest of Africa resulted in R170 million being approved for a gas pressure reducing station in Chokwe, Mozambique, to bring a 40MW gas power plant online.
34 Industrial Development Corporation of South Africa Limited Cap CASE STUDY TSHEDZA MINING RESOURCES
Mining is not only key to government’s economic and social transformation objectives but is also a critical driver of growth for its medium and long-term job-creation targets. The industry employs 496 000 people directly and 1.4 million indirectly, contributing about R292 billion to the country’s GDP.
Against the backdrop of challenges confronting the industry, Our partnership with Tshedza Mining – a mining company including the drop in commodity prices and rising input majority owned by Ichor Coal – is well on track to creating costs, the IDC continues to be a significant funder to the new black industrialists. In 2015, Tshedza Mining signed a industry, particularly black mining firms. 15-year coal supply and off-take agreement with Eskom for its newly developed Manungu Colliery (also known as Eloff Colliery), in Delmas, Mpumalanga. Tshedza will be one of the top-four suppliers to Kusile Power Plant once it becomes operational, supplying between 15% and 20% of the total coal requirement. IDC funding of R210 million was used for completion of the mine development including a weighbridge and other infrastructure required to bring the mine to production, and for working capital which helped finance the mine’s operating costs for the three months preceding first coal production and sales. The company now has 325 employees and intends to increase its workforce to 403 on achieving full production in 2018. Of particular significance to the IDC is that funding to Tshedza Mining complements the Corporation’s objectives of accelerating economic transformation and increasing the number of black industrialists.
The Manungu Colliery in Delmas, Mpumalanga, part-owned by Tshedza Mining, employs more than 300 people. IDC funding will enable the company to expand and ramp up production in the next three years. Above, coal is loaded for shipment to the treatment plant.
2016 Integrated Report 35 2 PERFORMANCE AND IMPACT
IMPACTING ON INDUSTRIAL DEVELOPMENT (continued)
The primary focus of our newly formed Heavy Manufacturing Funding approvals and disbursements in industrial infrastructure (R’million) unit is the efficient processing of developmentally impactful transactions in response to applications for funding within the industrial sectors served. These include sawmilling and wood products, the manufacturing of pulp, paper and cardboard, rubber products, glass and glass products, ceramics, cement,
concrete and other cement products, stone cutting and shaping, and the recycling of all non-metal goods. Funding to the value of R545 million was provided to new and existing business partners during the year, with R413 million disbursed. Of this, R32 million went to a paper product
manufacturer, and further expansionary funding was provided to a previously funded paper mill that exceeded expectations on both turnover and net profit. A further R127 million was disbursed to a tissue manufacturer that currently produces single-ply toilet paper from recycled material. The manufacturer required funding to diversify manufacturing capabilities with a two-ply range and a new converting plant which will convert both recycled and virgin paper to toilet paper. Two buy-outs to support black industrialists, a R141 million ICT and Electricity generation transaction in the paper and packaging sector and R150 million telecommunications and other for a company manufacturing reinforced concrete railway Approvals Disbursements sleepers, were approved. Despite participation in the tourism sector being HIGH IMPACT INDUSTRIES capital intensive, the sector has high job-creation The High Impact Industries sector encompasses impact and remains an important focus area manufacturing industries not covered in the for the IDC. The tough economic conditions priority value chains identified by the IDC. New have, however, forced the corporate market to Industries are those industries that are currently reduce their travel budgets, and this has led to non-existent, or very small in South Africa, some establishments shedding jobs to ensure but have the potential to grow and employ sustainability. Conversely, the depreciation of the significant numbers of people in the future. Rand bodes well for the sector as it makes South Here, we play a proactive role. Africa cheaper for foreign tourists and thus, an attractive destination. For industries falling under High Impact, which include Tourism, ICT, Clothing and Textiles, Media and Motion Pictures, and The revision of SA immigration regulations has restored Heavy and Light Manufacturing of, for example, furniture, IDC’s confidence in the stability of the sector, although a lack of approach is primarily to fund projects developed and packaged transformation remains a key challenge. The Tourism Charter, by entrepreneurs with little involvement in early-stage project which was promulgated in November 2015, requires black and development. women ownership of 30% and 15%, respectively. However, the high development costs for new establishments present a high The focus for the clothing and textiles industries during the year barrier to entry, rendering it difficult for black entrepreneurs to under review was to continue supporting existing clients, provide enter the sector because of a lack of equity to invest in such funding to new applicants, and participate in industry-wide cluster projects. There are ongoing discussions with the National activities and initiatives. Although there is an overall improvement Department of Tourism (NDT) to explore ways in which financial in the industry, especially in terms of increased demand for locally assistance and support could be offered to qualifying entities. manufactured products, the industry continues to face challenges. The weakening of the Rand adversely impacted manufacturers who Five transactions with a value of R222 million were approved to rely on imported raw materials, mostly fabrics. On a positive note, the support the tourism industry, with 223 jobs created. A private trend towards “fast fashion” means that retailers have a preference game reserve experiencing capacity limitations in attempting to for locally manufactured goods over imported products, given the host larger conferences at their facilities received funding, with quicker turnaround times. Fashion conscious consumers that follow R17 million approved for an additional 24 rooms which are set global trends want modern designs soon after they appear on to alleviate this constraint. international catwalks – not a season later. This has resulted in a shift Expansionary funding to the value of R62 million for a hotel in buying patterns with major retailers sourcing locally. dating back to 1958 will be used to completely overhaul the Approved funding of R554 million went to 31 companies during the rooms and conference facilities, allowing for the reconfiguration 2016 financial year, with R365 million disbursed by year end. Almost of 47 cottages into 55 rooms, as well as the addition of 35 new half the approved value went into the weaving sub-sector and some garden cottages. In supporting the need for local tourist to companies in the Cut, Make and Trim (CMT) environment. Pure attractions, we approved R1.3 million for the development of a CMT businesses received 33% of the total funding approved with the toboggan track near Sabie, Mpumalanga. balance going into the footwear, spinning and dyeing sub-sectors.
36 Industrial Development Corporation of South Africa Limited CASE STUDY K9 PETFOODS
The IDC has significantly increased levels of funding to women- owned and empowered businesses, indicating an increasing shift to supporting women’s role towards economic and social transformation.
Having identified an opportunity within the sphere of pet The most significant attributes of this transaction include: food production, K9 – a women-owned and empowered • Given the IDC’s objectives in facilitating import pet food manufacturer – approached the IDC for funding replacement, the project would support government’s to enable its acquisition of plant machinery to extend its initiatives in the replacement of pet food currently product offering in the fast growing pet food market. imported by Woolworths Established in 1996, the company produces frozen pet food • Woolworths, in line with its development initiatives, has from leased premises in Killarney Gardens, Cape Town. As entered into a five-year procurement contract with K9 in part of its growth plans, the company has since secured an the supply of its wet pet food range exclusive contract to manufacture wet pet food in the form • It creates an opportunity to facilitate innovative of chunks in gravy, for Woolworths and other retailers. technology in that K9’s re-sealable tub packaging (designed for Woolworths) will have first-mover advantage in the local pet food market • Apart from the IDC, both Woolworths and the dti’s Black Industrialist Scheme will provide funding towards the establishment of the plant in mitigating financial risk In essence, the IDC remains committed to ensuring the successful implementation of this project which will ultimately benefit the surrounding communities as well as provide significant development impact in terms of creating at least 25 new jobs.
Cape Town-based pet food manufacturer K9 is one of the beneficiaries of the IDC’s increased funding and support towards women-led businesses. IDC funding will assist the company to acquire plant machinery enabling it to extend its product offering in the fast-growing pet food market.
2016 Integrated Report 37 2 PERFORMANCE AND IMPACT
IMPACTING ON INDUSTRIAL DEVELOPMENT (continued)
The South African furniture industry is under threat from Still within light manufacturing, one transaction, in support increased international competition as a result of lack of of a black female industrialist, was approved for the jewellery investment in upgrades of machinery and equipment, sector. There has not been any uptake on the R1 billion Gold investment design skills and research and development. Given Loan Schemes approved in 2014 due mainly to the criteria of the labour intensity of the sector and job creation opportunities, the schemes not being in line with the requirements of the the IDC is pursuing development of the industry, especially manufacturers. Wholesale funding, to a refinery, for on-lending in light of the designation of certain furniture products for to manufacturers is being explored to enable access to funding. government procurement. Of the transactions approved, one In continuing our support to the local film industry, we was for a youth-owned business. disbursed R71 million, as a co-funder, for a number of features: The IDC’s focus on ICT largely revolves around the • Four 15-minute short films aimed at the 2016 Cannes manufacturing of radio, television and communication Directors’ Fortnight opening day, were combined into a equipment, a key driver of localisation. The sector is largely feature-length film by our emerging South African directors driven by procurement from government for products such • Various romantic comedies and a comedy drama feature film as smart meters, set-top boxes and tablets for e-learning. For about a journey of self-discovery these products, local manufacturing content is a requisite • A courtroom drama and this presents opportunities for emerging entrepreneurs • A six-part television mini-series based on the life of President to enter the sector. The bulk of raw materials used in the Nelson Mandela manufacturing processes are, however, imported which makes the sector susceptible to foreign exchange losses. On the ICT To expand the capacity for South African content services side, the sector lends itself well to the participation of in the media sector, R181 million was approved youth who have a predisposition towards coding and software for the development of a television studio in development. Johannesburg. Approvals of R204 million went to existing 100% black-owned companies in ICT services. Of the three transactions that supported black industrialists, two of these are fully owned by women.
Funding approvals and disbursements for High Impact areas and New Industries (R’million)
*** * ** **
-
- Wood and paper Electronic New Industries Furniture Healthcare Media, film Tourism facilities Transportation Textiles, clothing products, printing equipment and other activities and recreation and leather goods and publishing manufacturing
Approvals Disbursements
* There were no approvals in the financial year ** There were no disbursements made in the financial year *** Cancellations of funding for projects in this sector exceeded approvals
38 Industrial Development Corporation of South Africa Limited REST OF AFRICA Approvals in the rest of Africa: to (R’million) For the year under review, new funding approvals for projects in the rest of Africa were much lower than in the previous year with gross approvals of R255 million (R70 million after cancellations). The approvals were directed at four projects – two in Mozambique and one each in Nigeria and Zambia, to support forestry development, power generation, ICT and the basic chemicals industries. Disbursements into the rest of Africa amounted to R106 million, benefiting mining operations in the North Kivu province of the Democratic Republic of Congo. Our approach to funding projects in the rest of Africa changed in 2012. Where we fund projects in the region, we ensure the flow of benefits to South Africa. These include direct benefits such as exports from South Africa and other benefits such as the strengthening of regional value chains that will contribute to the development of South - African industries. This approach, we believe will be more beneficial for both South African companies and host countries as it supports our industrial development objectives and furthers - the regional integration agenda. - * *
* In 2012 and 2013, cancellations for projects in the rest of Africa exceeded approvals
The IDC’s rest of Africa footprint at March 2016 Sectors in Africa
Agro-processing (sugar)
Agro-processing (tea and macadamia nuts)
Agro-processing (grapes, poultry)
Agro-processing (cassava starch)
Agro-processing (sugar, bananas) MALI
Agro-processing (fruits) SENEGAL SUDAN Chemicals
Cement production NIGERIA ETHIOPIA TOGO SOUTH Electrical contracting SUDAN IVORY COAST GHANA Forestry UGANDA
DEMOCRATIC KENYA Forestry and related products REPUBLIC RWANDA OF CONGO Fabricated metal products TANZANIA Hotels
Infrastructure (grain silos) ANGOLA MALAWI Infrastructure (water) ZAMBIA
MOZAMBIQUE Lines of credit (to DFIs) ZIMBABWE NAMIBIA Light manufacturing BOTSWANA (particle board) Power generation
Media (electronic) Transport infrastructure (air and seaports)
Mining Transport infrastructure (roads) SWAZILAND
Mining and beneficiation Telecoms infrastructure
2016 Integrated Report 39 2 PERFORMANCE AND IMPACT
CONTRIBUTING TO SOCIO-ECONOMIC DEVELOPMENT
GROWING AND PRESERVING JOBS remote communities are bolstered by an arrangement of sharing office spaces with our subsidiary, sefa, and other DFIs. At 26.6%, unemployment in South Africa poses a challenge to the country and it has been exacerbated by the impact of the In line with economic activity, the bulk of gross transactions current slow growth cycle which has hampered the ability of the continues to emanate from the most industrialised provinces economy to create and retain employment opportunities for an being, Gauteng (34%), Western Cape (23%) and KwaZulu-Natal expanding labour force. A priority for the IDC has therefore been (14%), with 29% of transactions being concluded in the other six to facilitate employment creation as well as to preserve existing provinces. jobs through its financing activities. Against this background, In respect of the distribution of gross value of funding, the number of jobs expected to be created and saved through Limpopo accounted for a significant share at 32%, as a result IDC funding stood at 15 272 in the year under review. The of investments in the fertiliser and nitrogen compounds and Corporation is targeting the creation and saving of 20 000 jobs mining sectors. Gauteng received 24% and KwaZulu-Natal 17%. in the year ahead, with this figure set to rise to a possible 66 000 Rural development remains a critical challenge and we recognise over the three-year period to 2019. the need to integrate the rural economy into the mainstream economy. Accordingly, we have been proactively identifying REGIONAL EQUITY opportunities that have the potential to impact significantly on The promotion of regional equity is a key strategic objective rural communities while avoiding duplicating the activities and of the Corporation and a number of interventions have been mandates of other role players present in those communities. designed to facilitate development in less developed rural areas. IDC funding for activities in rural areas has totalled R31 billion LA We have a network of regional and satellite offices across the for the past 20 years, with an estimated 104 000 cumulative jobs country providing potential and existing clients with access either saved or created. Despite significant IDC intervention in to staff and services in those areas. Efforts at reaching out to most rural areas, the severe drought experienced across the country in 2015 had a severe impact on rural enterprises and development.
PROVINCIAL DISTRIBUTION
Provincial distribution of gross value and number of funding approvals in South Africa Limpopo 32% Gauteng 5%
Mpumalanga North West 24% 34% 4% 1% 5% 2%
KwaZulu-Natal Free State 17% <1% 14% 1% Northern Cape 7% 6%
Eastern Cape 5% 8% Western Cape 9% 23% Percentage of gross approvals (Rand value) Percentage of funding approvals (number)
40 Industrial Development Corporation of South Africa Limited ENTERPRISE DEVELOPMENT AND certified as a Level 2 contributor. In addition, we take a broad TRANSFORMATION view on empowerment and encourage our business partners to embrace the objectives and spirit of the pillars of the Codes, SMALL AND MEDIUM ENTERPRISES insisting not only their compliance but also on a commitment Over the last 20 years, more than 70% of the number and 18% of towards developing and implementing a plan of action that will the value of IDC funding approvals went to small and medium ultimately see them achieving at least a Level 4 under the Codes. enterprises (SMEs). BLACK INDUSTRIALISTS The IDC is keen to ensure the participation of SMEs in critical sectors of the economy which have long been dominated Manufacturing is critical to the country’s key by very large players. In addition to the work of its subsidiary, developmental objectives of industrialisation, sefa, and in line with this commitment, approvals in this area skills development, job creation, localisation and increased from R2.0 billion in 2015 to R2.2 billion in 2016 in 98 SME transactions. supplier development.
BLACK ECONOMIC EMPOWERMENT The Black Industrialists programme is intended to promote the participation of black entrepreneurs in key sectors of the The IDC assists black businesses in establishing, growing and/or economy. The IDC supports black industrialists by providing diversifying their businesses. The IDC also ensures that it is at the them with funding at favourable lending rates. We have adjusted forefront of policy developments such as the Revised B-BBEE our pricing model, making it easier for them to obtain a greater Codes and the new Black Industrialist Framework to ensure that pricing benefit. Special pricing has been made available and its funding activities are in line with evolving national policies. includes a discount of 150 basis points (1.5%) based on the IDC’s As the development finance institution with the largest BEE risk pricing approach, and an additional discount of 200 basis book nationally, we have, over the years, seen encouraging points (2%) for meeting other developmental objectives such achievements on a number of transformation indicators as jobs to be created. Other key developmental outcomes such including youth, women, black industrialists, B-BBEE, SMEs and as impact in under-developed regions also contribute towards jobs. During the reporting period, we approved 76 transactions discounted pricing. valued at R4.9 billion for black-empowered businesses with black In addition to financial support, we provide business support shareholdings in excess of 25% (excluding funding to subsidiaries). with several proactive initiatives aimed at either identifying This accounted for 35.7% of the total value of all funding new, or further developing already active, black industrialists. approvals, in turn accounting for 7 010 jobs that are expected to Accordingly, we have seen a significant increase in the number be created and saved in the year under review. and value of businesses falling within this category. R2.9 billion We have undertaken to lead by example through our (up from R2 billion) was approved for 56 black industrialists and implementation of the B-BBEE Codes, and the IDC is currently supporting the creation of 2 263 new jobs.
CASE STUDY GREENABLE
Changing lives of disabled individuals through a sustainable model that provides income opportunities while actively contributing to saving our environment.
GreenABLE, an IDC-supported non-profit organisation, is a facility that provides sustainable business opportunities for people living with disabilities. GreenABLE has been in operation since 1 June 2011. It hosts a recycling solution for the dismantling, cleaning and sorting of empty printer cartridges and redundant printers into their recyclable components. In the process, the organisation facilitates employment, skills development and workplace integration opportunities for previously disadvantaged persons living with disabilities, of whom 89% are women and 63% youth. Participation in these income-generating projects is enabled through incubation facilities. The facility, therefore, enhances skills levels while furthering the green economy goals of South Africa. GreenABLE’s goals and objectives are premised on six pillars, namely: job creation, skills development, employment, collaborative partnerships, sustainability and environmental stewardship. The IDC provided grant funding of R2.9 million for the purchase of equipment and transportation vehicles. Employees at GreenABLE repackage cartridges in readiness for recycling.
2016 Integrated Report 41 2 PERFORMANCE AND IMPACT
CONTRIBUTING TO SOCIO-ECONOMIC DEVELOPMENT (continued)
The IDC is working towards a target value of R23 billion for allocated to other spatial interventions, however, some transactions aimed at benefiting black industrialists over the five commitments to these agencies still exist. In the past financial years to 2020. year, we approved three transactions amounting to R16 million. LA
YOUTH ENTREPRENEURS Social enterprises are businesses with social missions which, through their lines of business, tackle social and environmental Youth unemployment is one of the biggest problems, and improve the lives of often the most vulnerable challenges facing the country. The IDC people and communities. Through our Social Enterprise Fund, recognises the extent of this challenge and has we have supported various social enterprises across the country. The IDC has as its partner in this programme, the Government proactively been promoting initiatives that seek of Flanders, which has provided €4 million in funding over three to encourage youth participation in job-creation years to facilitate the growth of this sector. initiatives and entrepreneurship. During this reporting period, four social enterprises – a youth- owned waste collection and recycling business and three small Some of the challenges we face relating to youth funding farmer development enterprises – were funded to the value of include undeveloped balance sheets, limited skills and capacity, R15 million. Also, one of the enterprises supported by the IDC, LA and inadequate access to information and opportunities. The Clothing Bank, recently won the 2016 Schwab Foundation’s In recognising the imperative to help youth overcome these International Social Entrepreneur of the Year award. The Schwab challenges and grow their businesses, we appointed “Youth Foundation is part of the World Economic Forum. Specialists” to drive and enhance our youth focus, during the year under review. This has resulted in changes to the Gro-E Our Spatial Intervention Fund, which aims to address the Youth Scheme, introduction of a Youth Pipeline Development socio-economic and developmental needs of targeted, largely Programme and a more robust Business Support Programme. marginalised, areas through public, private and community In addition, adjustments were made to the IDC systems, partnerships, has yielded many innovative and impactful processes and products that facilitate youth enterprise initiatives. Four projects – a small farmer support programme, development. an inclusive business with supplier linkages into major retailers, an employee-ownership initiative and a township During the reporting period, R970 million was approved for youth support programme – were funded to the value of 19 transactions with youth shareholdings of more than 25%. This approximately R18 million. LA is a marked increase from the previous year’s performance when R159 million was approved for 11 transactions. The Corporation Regarding workers, and community trusts, the IDC has funded is targeting R4.5 billion for the funding of youth-empowered 22 local community trusts to an amount of R2.6 billion, and businesses for the five years to 2020. the communities are set to receive dividends of approximately R10.3 billion over a period of 20 years. We also provided expert WOMEN EMPOWERMENT advice and assisted with capacity-building for bidders under The empowerment of women is important to the IDC. Efforts the Department of Energy’s renewable energy programme, to provide support to female entrepreneurs have resulted in specifically with regard to the inclusion of community significant improvements. participation in their business plans in line with bid requirements. The number of workers and community trusts registered has The IDC has significantly increased levels of gradually increased as the programme has been rolled out. funding for women-empowered deals, indicating CORPORATE SOCIAL INVESTMENT (CSI) an increasing shift to women in larger businesses. The Corporate Social Investment (CSI) During the year under review, the IDC introduced specific targets programme of the IDC supports initiatives for the funding of women, aimed at increasing the funding support for women-empowered enterprises. This has had an with the goal of contributing towards the immediate impact with approximately R1.2 billion being approved improvement of the socio-economic conditions against a target of R600 million. This is a significant improvement of people in disadvantaged communities, compared to the R756 million approved in the previous year. focusing on education and entrepreneurship. It is anticipated that the IDC will have funded women- empowered businesses to the value of R4.5 billion over the five During 2016 our initiatives were implemented according to focus years to 2020. areas as indicated below.
COMMUNITY EMPOWERMENT AND IDC CSI percentage spend per focus area SOCIO-ECONOMIC DEVELOPMENT The Corporation remains actively involved in numerous regional development activities that include assisting local authorities and provincial governments in formulating their development strategies as well as participating directly in various spatial development initiatives. Over the years, through our grant Education and training Sustainable livelihoods funding for the establishment and running of development Special projects and ad hoc agencies, we crowded in nearly R2 billion across 32 agencies, Employee volunteering mainly in rural areas and townships. Thus, on average, each and giving rand provided to an agency by the IDC had a nine-fold leverage effect. The programme has since ended, with resources
42 Industrial Development Corporation of South Africa Limited Education and training are at the core of the IDC’s CSI The IDC’s external bursary programme programme. Support in this area is aligned to government’s priorities as outlined in Chapter 9 of the National Development supports talented students from previously Plan. Through these investments, the IDC affirms the disadvantaged backgrounds who cannot afford government’s principle that education and training are tertiary education fees. critical for South Africa to meet its long-term socio-economic developmental goals. In the 2015 academic year, we supported 223 students. These beneficiaries’ fields of study are aligned with core IDC operation In terms of sustainable livelihoods, our CSI programme also areas and also constitute those areas that have been identified as supports micro/survivalist enterprises that seek to alleviate scarce and critical for the country. These include accounting and poverty, create jobs and develop youth with appropriate skills to engineering, among others. At the end of the 2015 academic increase their chances of employment. This aligns well with, and year, 57 bursars had successfully completed their studies. A total complements, our developmental mandate. of 134 students passed and progressed to the next level of study A total of R39 million was spent in support of 26 initiatives. and 72 new students are being supported. The distribution of funds is illustrated below. The following graph is a representation by race and gender of IDC CSI spend (R’million) the external bursary recipients.
Number of external bursary recipients by race and gender –
0 5 10 15 20 25
R million Employee volunteering and giving R million Special projects and ad hoc R million Sustainable livelihoods R million Education and training
Given that education is at the heart of the IDC’s CSI programme, it is allocated the largest proportion of the budget. About 85% of the education budget went to supporting interventions in the IDC’s 30 adopted schools, while 8% went towards the support for Technical Vocational Education and Training (TVET colleges). This sector is central to efforts to improve skills development for the economy. Government has identified TVET colleges as Indian Coloured White African preferred training providers for scarce skills training programmes such as for artisans and in engineering sciences. Going forward, Female Male Total support for this sector will increase to at least 15% of the education portfolio going forward.
SUPPORTING SKILLS DEVELOPMENT IN OUR ENVIRONMENTAL SUSTAINABILITY COMMUNITIES The IDC has developed an Environmental and We continued supporting youth development through various Social Framework which ensures consistent and programmes. The number of participants on our Graduate systematic consideration of environmental and Development Programme increased to 40 (2015: 30) and the graduates were placed across all the IDC offices nationally. The social components of all project investments. main objective of this programme was to expose graduates to The IDC is, therefore, committed to supporting practical work experience and equip them with the required projects that are environmentally and socially skills in preparing for the world of work. sustainable. Our Chartered Accountant Learnership programme remained stable with 12 trainees at different levels of the three-year We conduct environmental and social due diligences for new programme. During the period under review, we also introduced clients and monitor high-risk clients. The Environmental and Social a learnership programme for people with disabilities. A total Risk Rating (ESRR) is used as follows: of 30 young people with disabilities were enrolled on an NQF • ESRR 1: Excellent Level 3 Contact Centre and Business Process Outsourcing • ESRR 2: Good Learnership. The learners successfully concluded their • ESRR 3: Poor learnerships and have been absorbed into various organisations. • ESRR 4: Unacceptable Our partnership with Scaw Metals has seen us support 30 young people on an apprenticeship programme in various trades. This programme started in 2014 and will continue until 2018.
2016 Integrated Report 43 2 PERFORMANCE AND IMPACT
CONTRIBUTING TO SOCIO-ECONOMIC DEVELOPMENT (continued)
Of the clients monitored during the year under review and through Our commitment to health and safety is driven by our executive continuous engagement with them, we were able on average management, assisted by more than 40 members serving on to improve their ESRR from “poor” to “good”. There were two various health and safety committees. These committees were clients who scored an ESRR that was, at 4, unacceptable and the established to strengthen and enforce compliance, conduct IDC is currently working with the authorities to rectify their non- regular site inspections and assist in cases of emergency. The compliance. Health and Safety Committee meets on a quarterly basis and minutes of the proceedings are recorded and retained. In terms LA Regarding material subsidiaries’ environmental impact, during this of reporting, in addition to incidents at the IDC itself, the IDC financial year a gap analysis was conducted on Foskor and Scaw’s is mandated to report incidents at subsidiaries, although only carbon footprint data management and reporting systems and where it has a shareholding of more than 50%. No reportable processes, to identify the extent to which these material subsidiaries work-related fatalities or occupational diseases were recorded are ready for independent assurance. in the year under review, and during the same period, only one Foskor has subsequently developed an action plan to address lost-time incident was noted at the IDC Head Office, when an non-compliance issues raised during the assessment carried out by employee slipped and fell on a wet floor. the authorities. However, Foskor will not be able to meet the new We have reviewed the role and composition of our health emission standards which are proposed for compliance by 2020. For and safety committees and have reduced the number of Foskor to meet the new emission standards, capital investment on subcommittees of the Occupational Health and Safety new emission infrastructure would have to be considered. Committee to one. The new subcommittee will incorporate the The IDC strives to ensure that it always operates in an responsibilities of the Fire Marshal and First Aid sub-committees environmentally and socially acceptable manner, as a responsible in addition to focusing on a management of emergency organisation, when carrying out its business. Provisions for closure preparedness and response programme. and rehabilitation are made at a Group level, according to the specific requirements of its subsidiaries. Consequently, for the CARBON FOOTPRINT period under review, costs for the treatment of the contaminated The IDC has voluntarily participated in the Carbon Disclosure land at African Chrome and the waste dump rehabilitation at the Project (CDP) since 2013, measuring and reporting on its carbon Columbus Joint Venture were covered by IDC and amounted emissions in line with the Greenhouse Gas Protocol guidelines, to approximately R78 million. We also committed R21 million to the ISO 14064 (parts 1 to 3) and the Inter-governmental Panel the waste management plan at the Middelburg contamination for Climate Change (IPCC) guidelines. We have based our dump. The rehabilitation programme has now been completed organisational carbon footprint determination on the standard and a final report will be submitted to the Department of carbon management pillars: plan, communicate, measure, Environmental Affairs. We also continue to monitor and implement reduce and offset. The emission factors utilised in the calculation recommendations by the Department of Environmental Affairs were obtained from published and credible data sources and at Scaw Metals and have provided funding to install new referenced accordingly. The emission factor for electricity was equipment to enable the company to comply with environmental obtained from the Eskom website. requirements regarding air pollution. The historical reporting and assurance of the IDC’s greenhouse LA IDC management continues with the journey to enhance the gas (GHG) emissions performance have been based on the GHG adequacy and accuracy of environmental rehabilitation provisioning emissions of the head office operations. Over the years, the across the Group to ensure that environmental stewardship is IDC committed to widening the sustainability reporting and upheld by entities over which it has influence. assurance boundaries for material subsidiaries. As such, energy and carbon footprint performance data have been disclosed for HEALTH AND SAFETY the material subsidiaries in the IDC’s Integrated Report. The IDC values the health and safety of its employees, clients, It is the IDC’s commitment to deepen the carbon footprint contractors and subsidiary employees. assurance for material contributors across the Group in order to In compliance with Occupational Health promote environmental sustainability. The emission intensities of subsidiaries are product-based and are reported separately at and Safety Act, 1993 (as amended), and as a subsidiary level. During the period under review, the IDC’s Scope responsible organisation, the IDC continues 1 emissions contributed only 7% to its total emissions, Scope 2, to focus on the provision of a safe and risk- 52% and Scope 3, 41%. The addition of Scope 1 and 2 emissions from IDC’s subsidiaries to the IDC’s Scope 1 and 2 emissions free business environment for its employees, count has a considerable impact with emission levels ballooning
contractors, subsidiaries, business partners from 6 667tCO2e to 1 298 301tCO2e. and visitors.
44 Industrial Development Corporation of South Africa Limited CASE STUDY FUEL FROM THE SUN
As one of the early adopters of renewable energy in Sub-Saharan Africa, South Africa has embraced a considerable amount of clean energy infrastructure.
The transition to a low-carbon economy and the potential The charging station, which is based at the IDC head office for job creation opportunities has led to IDC investment in Sandton, Johannesburg, comprises 8kW of solar panels in excess of R14.5 billion over the last five years, in support that convert sunlight into electricity, 60kWh of batteries that of both government and private sector-led renewable store the energy, and four car parking bays with chargers. energy projects. Though open to the public, this facility enables IDC In support of green energy infrastructure, the IDC, in employees who have electric vehicles to charge their partnership with the United Nations Industrial Development vehicles without payment, in the process contributing Organisation (UNIDO), the South African National to government initiatives aimed at reducing carbon Energy Development Institute (SANEDI) and the City of emmissions. Even more encouraging is the fact that this Johannesburg, recently built the first solar charging station facility is in line with the City of Johannesburg’s initiatives for electric vehicles in Africa. Totally clean and highly to bolster and accelerate the adoption of greener and more efficient, this is considered the future of transport energy. accessible public transport. In addition, the IDC, using Green Fund lines in partnership with leading European and international development banks, such as AfD, KfW and USAid, continues to support the roll-out of solar power infrastructure, including green transport initiatives.
An aerial view of the electric charging station built at the IDC head office in Sandton, Johannesburg. In partnership with stakeholders, IDC continues to support the roll-out of infrastructure and initiatives supporting green transport.
2016 Integrated Report 45 2 PERFORMANCE AND IMPACT
CONTRIBUTING TO SOCIO-ECONOMIC DEVELOPMENT (continued)
Consumption of electricity by IDC amounted to 20 484GJ (see table below). The energy data of clients are not disclosed in the table below. The IDC energy consumption data
Energy intensity Base year 2015/16 2014/15 2013/14 Per area Per employee Activity data Energy (GJ) Energy (GJ) Energy (GJ) 25 220m2 825 Diesel (for vehicles) 429 363 327 0.02 0.51 Petrol 315 645 685 0.01 0.37 Stationary fuel (diesel for generator) 4 598 130 124 0.13 5.42 Jet fuel 7 823 4 170 3 397 0.31 9.21 Electricity 20 484 20 091 21 755 0.81 24.13 Total 33 649* 25 399 26 287 1.28 39.64
* Increase in material consumption resulting from diesel and jet fuel
The IDC’s total energy consumption has increased by 24% relative to 50% of our investments are located in drought-stricken areas with the base year. Such substantial changes in energy consumption are half of those in areas declared as disaster zones. This affected attributable to the frequent internal use of the jet (due to its added primary activities that use significant amounts of water, such as external travel use), and increased use in stationary fuel to power agriculture and mining. an onsite generator during load shedding. However, electricity We are currently working on initiatives to assist clients that have consumption has decreased marginally by 6% relative to the base been affected by drought, and have identified clients who would year (resultant: an increase in diesel generator fuel use is thought to benefit from water-efficiency applications in their operations. We have been offset by a decrease in electricity). have signed a Memorandum of Understanding (MoU) with the Reducing and offsetting National Cleaner Production Centre (NCPC) to undertake these assessments. Our subsidiaries are investigating measures to introduce energy- efficient or energy-saving measures that will positively impact The NCPC will be conducting water-efficiency assessments on the the Group’s carbon footprint. IDC’s behalf in various sectors so as to reduce water consumption and provide implementation plans for more significant savings. Carbon tax implications The South African government is currently deliberating the Carbon Tax Bill which the IDC will be expected to comply with in its business dealings once it has been promulgated as an Act. The carbon tax starts at R120 per tonne of CO2e, increasing at 10% per year, limited to Scope 1 emissions and with basic free allowance for businesses across certain sectors to the amount of 60% of their annual Scope 1 emissions. An emission benchmark per unit of output will be defined for each sector. Though the IDC carbon footprint is insignificant relative to that of its major operational subsidiaries, the IDC will be eligible for carbon tax, through its subsidiaries, on its Scope 1 emissions. The IDC is a member of, and an active participant in the The United Nations Environmental Programme for Financial Institutions (UNEPFI).
Water and drought The IDC is also impacted by the drought affecting the country, with KwaZulu-Natal, Limpopo, North West, Free State and the Northern Cape the worst hit provinces.
46 Industrial Development Corporation of South Africa Limited BUILDING STRONG PARTNERSHIPS
STAKEHOLDER MANAGEMENT Our stakeholders fall into three categories: our people, our clients, and others. They affect and influence the Corporation in various ways. Engagement with our stakeholders is critical in helping us in the development of our strategies, and in the implementation of processes that ultimately help us to deliver on our mandate. Some of our key stakeholders
Economic Development Department (shareholder Communities, NGOs and representative) Board of directors Employees academic institutions National, provincial and local government departments Subsidiaries and associates General public Media Clients/customers Co-investors, co-funders and Industry bodies, associations and Ratings agencies and regulatory State-owned companies (SOCs) funders of the IDC business chambers bodies
We continuously engage our stakeholders by OUR PEOPLE establishing and maintaining good lines of Given our mandate, and as a leader in industrial development communication between them and ourselves. finance, we recognise the need for an appropriate skills set that is driven by a high-performance culture. This is critical in helping us Managing stakeholder relations is fundamental to deliver on our mandate to serve industries, business partners, to our corporate strategy and is a planned and stakeholders and, more broadly, the South African economy. deliberate process. In facilitating competitive industrialisation it is necessary for us to have competitive and capable resources to deliver on our strategic STAKEHOLDER STRATEGY AND PLAN intent. We do this through a number of key strategic pillars: Ongoing collaboration with and engagement of stakeholders is • Capacitation; imperative, as our success and theirs are interdependent. We rely • Ensuring an enabling working environment for our people to on these partnerships in order to effectively fulfil our mandate of thrive; accelerating industrial development and facilitating job creation. • Providing the necessary development and growth From a process point of view, a corporate stakeholder strategy opportunities; was developed both to guide our engagement and to ensure • Supporting broader skills development in our country; and consistency in the way that we engage with our stakeholders. This • Ensuring customer-centric values-based service delivery to strategy defines stakeholder categories, identifies key stakeholders internal and external stakeholders. and their interests and involvement, and determines issues on Project Evolve necessitated the focus on ensuring effective and which the Corporation should engage them. The implementation efficient capacitation to prepare the organisation for future plan also outlines the mode and frequency of interactions challenges. The ultimate objective is to enable the efficient and for each stakeholder and determines the IDC representatives optimum utilisation of resources ensuring that the Corporation responsible and accountable for each stakeholder. does more with available resources. SBUs, departments and regions have stakeholder management strategies and plans that are part of their annual business plans. These are reviewed annually and as and when required.
IDC employees in their working environment at our Sandton headquarters.
2016 Integrated Report 47 2 PERFORMANCE AND IMPACT
BUILDING STRONG PARTNERSHIPS (continued)
This report will focus on the key areas in the diagram below.
KEY PEOPLE FOCUS AREAS
Being resourced and capacitated to deliver
Facilitating Supporting and enabling a skills conducive development environment in our for our people communities Driving the IDC’s to deliver competitiveness through its people
Recognising and Aligning the capabilities, rewarding our people skills and competencies required to deliver
BEING RESOURCED AND CAPACITATED TO KEY PEOPLE FOCUS AREAS DELIVER Staff profile by equity and gender: Number of employees – Our staff remain the key driver of our March 2016 strategy, with diversity enabling us to Gender African Coloured Indian White Grand total LA maintain a competitive edge in delivering Female 306 40 38 65 449 to a diverse market. Male 257 28 33 81 399 Total 563 68 71 146 848 LA During the year under review, our staff complement increased % 67 8 8 17 100 marginally by 3% to 848 employees (2015: 825). Of the 848 employees, 831 were full-time permanent employees and The IDC five-year employment equity plan was concluded 17 were on three-year fixed-term contracts. Twelve of these were at the end of March 2016. A new three-year plan has been trainee accountants on a chartered accountant learnership and approved and will continue to focus on enhancing diversity and six were supporting the Presidential Infrastructure Coordinating representivity, not only overall, but also in areas where we lag Unit. Of the 17 fixed-term contractors 41% were female and 59% behind the economically active population figures. A detailed male. Furthermore, 94% of the fixed-term contract employees breakdown of our planned and actual numerical targets for were from designated groups, and the services of 5% temporary employment equity is available on our website in section 5 of contractors were used. On the assumption that economic the Integrated Report. activity will increase significantly, we project a staff complement not greater than 930 employees by the end of the 2017 financial We firmly believe that a healthy generational age mix within the LA year. A comprehensive breakdown of staffing numbers by level organisation stimulates new and divergent thinking and enables is provided on our website in section 5 of the Integrated Report. us to capitalise on the tacit and explicit knowledge, skills and experience among our employees. As at the end of March 2016, LA We continuously strive to ensure that our staff profile is 49% (2015: 52%) of employees were younger than 40 years of representative of the broader society. Our overall equity age, a further 49% were between 40 and 60 years of age (2015: representation increased by 1% to 91% (2015: 90%). Gender 46%) and 2% were 60 years or older (2015: 2%). diversity is an imperative and, reflecting this, 53% of all employees are female and 47% male, a ratio that has remained constant since the previous reporting period. The number of people with disabilities decreased slightly by 0.2% to 1.5% compared to the previous year.
48 Industrial Development Corporation of South Africa Limited LA A NATIONAL FOOTPRINT turnover for State-owned enterprises was 12.7%, and 17.1% for Financial Services for the period 1 January to 31 December 2015. Our regional staff complement represents 7.1% of our staff According to the Remchannel Survey conducted by PWC in 2015, population (2015: 6.8%), and our national footprint ensures that the overall labour turnover was 22.6% – a figure higher than the we respond to the specific business needs and opportunities in 18.2% reported in March 2015. Losing skilled talent, particularly all regions. As at the end of March 2016, we employed 60 staff at the senior level, could impact significantly on our ability to in regional offices compared to 56 in the previous year. This serve our stakeholders and successfully transition and drive the increase was due mainly to extending our presence to outlying strategically realigned intent of the Corporation. (To read more areas in a number of provinces. A detailed breakdown by region about our strategy, please see under Our strategy on page 22.) is provided on our website in section 5 of the Integrated Report. To attract and retain talented individuals, we strive to provide an ATTRACTING AND RETAINING TALENT enabling and supportive environment for our staff. TO DELIVER OUR MANDATE FACILITATING AN ENABLING AND We strive to be recognised as an employer of SUPPORTIVE ENVIRONMENT choice, and one that creates value in the work In order to embed the strategic realignment process, we needed lives of current and future employees. to ensure all staff were “on-board” and committed to our strategic focus. In support of the change journey, our employees During the reporting period, we were recognised as a top were capacitated through change management workshops to employer through the Corporate Research Foundation (CRF) equip them with the required skills to adapt to and embrace the employer accreditation process. This independent audit assesses changes brought about by Project Evolve. This capacitation was employers on planned people practices in place, as well as on the further supported through the appointment of internal change consistency and application of those practices in the workplace. advocates, the facilitation of team enablement and strategic In the year ahead, we will continue to focus on improving those alignment sessions, and executive and leadership coaching areas where we fall short in our people practices and will also aim necessary to drive the leadership engagement and behaviours for reaccreditation in the financial year. required to support the business. Given the competing jobs market, our talent is highly sought In addition, we compiled and approved a change index measure after in the market place. This has resulted in natural attrition to ascertain the success and impact of the change journey. which we are consistently managing to ensure that we keep it within a reasonable limit. Through our change advocate network, we will In as much as skilled and talented people want to join the IDC, continue to remain close to the change impacts attracting and retaining the best skills set from sectors and happening “on the ground” so we can respond industries with more flexible remuneration practices remains a challenge, specifically with regard to senior staff with critical accordingly. and scarce skills. Our overall staff turnover has decreased quite As the IDC gradually adopted Project Evolve, initial analysis significantly by 5.1 percentage points to 5.6% for the year indicated that, in order to realise the new strategic intent under review. (2015: 10.7%). This reduction can be attributed to successfully, we needed to minimise the gaps between the potentially fewer opportunities in the current economic climate, current culture and the desired corporate culture. In order to but could also be as a result of our having bedded down our ensure that we drive towards the desired culture, we conducted strategic realignment process, as this may have resulted in a diagnostic culture survey using the Barrett’s Culture Values uncertainty among staff in the previous financial year. A detailed Assessment (CVA) tool. 63% of our staff members participated, synopsis of staff movements and turnover for the last three and results were shared at corporate and divisional levels. While financial years is available on our website in section 5 of the these results revealed the positive aspects of our culture that Integrated Report. support the Corporation, they also demonstrated those limiting In the specialist/expertise management and executive positions behaviours which, if not addressed, may compromise the where the majority of critical roles exist, we experienced achievement of our business objectives. a reduction in turnover to 7.7% (2015: 9.7%). The challenge In addition to this initiative, we also undertook facilitated remains, though, to manage and retain talented employees in leadership sessions to determine the priority culture shifts that these categories. Encouragingly, our turnover levels compare need to be addressed and these interventions, as indicated favourably with industry norms where the average market below, will be a focus in the next financial year.
Priority corporate culture shifts
Embedding Driving greater Enabling effective Defining accountability, Ensuring effective performance and and firming trust and customer employee consequence up the IDC’s enhanced centricity engagement and management operational risk decision making communication practices appetite
Supported by corporate values and key behaviours
2016 Integrated Report 49 2 PERFORMANCE AND IMPACT
BUILDING STRONG PARTNERSHIPS (continued)
ENSURING APPROPRIATE EMPLOYEE CONDUCT Managing employee conduct in a dynamic and professional CORE CAPABILITIES environment as a responsible employer requires firm and decisive action, and the year under review saw a total of 13 internal disciplinary matters being managed and resolved. Through the Industry and Sector employee grievance process, employees have the right to report Knowledge any incidents of discrimination, and these are addressed through Change Development our formal process and policy. In addition, the employment Management Finance equity forum reviews our people practices to highlight any potential areas of discrimination. During the period under review, no incidents of discrimination were recorded. We resolved four Portfolio/ formal grievances about employee practices and no grievances Stakeholder Core Investment Management remained unresolved from the previous financial year. The IDC capabilities Management operates within the provisions of all relevant labour legislation including the provision of minimum notice periods regarding operational changes should these arise. Risk Opportunity Management Sourcing EMPLOYEE WELLNESS Project Our employee wellness initiatives aim to educate employees Development about the importance of identifying, preventing, managing and resolving wellness matters to ensure continued and sustained productivity. Independent Counselling and Advisory Services (ICAS) Southern Africa and Discovery Health are our partners in giving effect We implemented several interventions to build and enhance the to our Employee Wellness Programme, and employees and skill sets of our people. These include leadership development, their immediate family members have access to voluntary core operational skills training, functional and behavioural counselling and support as may be required. Our employees training and academic training through staff bursaries. A new also participate in the annual Wellness Day where they can initiative aimed at knowledge harvesting was introduced in interact with healthcare professionals for a detailed lifestyle support of the new business focus and operational structure. audit to enhance their personal awareness and understanding Successes and failures were recorded through our Lessons Learnt of health-related matters. portal which can be accessed by all employees. New mini-sites on our intranet, SharePoint, were also designed and rolled out We provide voluntary testing for HIV/Aids to all our employees to all business units and departments and we envisage further and annual medical screenings to encourage all employees over support for the desired levels of communication in the business. the age of 40 to adopt a healthy and productive lifestyle and proactively manage their health risks. Participation by eligible While we continue to ensure that our employees are adequately employees in this initiative has grown by 4% year-on-year (2015: skilled and capacitated, our focus on the year ahead will be on building the required leadership competencies and supporting 68%). IDC employees also have access to “retire fit” training to behaviours, and on embedding a customer-centric culture. plan effectively for retirement. Our wellness support partner, ICAS Southern Africa counsels and advises those preparing for retirement, while an appointed financial adviser advises about financial management for retirement.
LA BUILDING SKILLS AND CAPABILITIES The IDC recognises the need to have the right people with appropriate skills to help us deliver on our mandate. Against this background, we identified a set of capabilities to support the implementation of Project Evolve. These are aspects at which we need to excel in order to drive our strategy and high performance. The identified capabilities which will be prioritised for development purposes are reflected below.
50 Industrial Development Corporation of South Africa Limited The number of employees trained during the year under review LA increased to 673 (2015: 593). The graphs below reflect by race Total number of employees trained, by race and gender and gender the number of employees trained, as well as the equity percentage split.
LA Percentage of employees trained, by race
African Coloured Indian White
African White Coloured Indian
Female Male Total
The tables below are an indication of the time spent in training segmented by gender and employee band. Training investment for employees
Female (347) S Band A Band P Band M Band E Band Total LA Total in days 4 126 251 155 6 542 Average hours per employee category 32.0 10.0 13.1 13.9 16.0 12.5
Male (326) S Band A Band P Band M Band E Band Total LA Total in days 9 26 194 287 1 517 Average hours per employee category 12.0 9.5 12.2 13.5 8.0 12.7
The total staff cost during the year under review was The remuneration policy was changed during the course of approximately R1 billion. The training expenditure as a the financial year to enhance the focus of the IDC on its core percentage of staff costs increased to 2% (2015: R903 million, development and sustainability imperatives, and to affirm 0.6%). A comparative summary of investment in staff training is the incentive principle that bonuses should only be paid for available on our website in section 5 of the Integrated Report. exceeding objectives and not merely for meeting them.
RECOGNISING AND REWARDING THE On the new short-term incentive (STI), bonuses are paid for PERFORMANCE OF OUR PEOPLE exceeding objectives. In order to remain market-competitive, so that the IDC can attract and retain talent of requisite calibre, Since our employees are integral to achieving our corporate a portion of the on-target STI that was payable in terms of the objectives, we strive to keep them engaged, motivated and previous policy has been incorporated into base pay by means appreciated and we endeavour to attract and retain high-calibre, of a once-off increase in the annual guaranteed pay (AGP) and high-performing individuals who subscribe to the values and the introduction of a non-pensionable allowance (NPA). culture of the organisation. The Board and Shareholder has directed that the performance Performance management and development are key enablers in management system should reward increased efforts and establishing and reinforcing employee behaviours and outputs sustainable successes and that incentives should only be that will help achieve our business goals and objectives. This payable for exceptional performance. In addition, targets for requires continuous formal and informal feedback as part of an certain strategic indicators will have to be met for incentives ongoing performance improvement process. to be considered, in particular those indicators related to jobs, The Corporation’s remuneration philosophy is designed to disbursements and impairments. ensure that employees are remunerated fairly, equitably The NPA is only payable to employees with acceptable and consistently based on individual performance, market performance ratings in terms of the Corporation’s performance remuneration trends and relative value of each position within management system. While the overall impact of these changes the business. The principle of performance-based remuneration is the reduction of the on-target remuneration, especially is one of the cornerstones of the remuneration policy and it for senior employees, there is enhanced guaranteed pay for is underpinned by sound governance principles which are employees that meet performance expectations. The value of reviewed periodically to drive alignment with changes in the package in the case of exceptional performance remains the remuneration trends and practices. same as before so as to encourage and reward excellence.
2016 Integrated Report 51 2 PERFORMANCE AND IMPACT
BUILDING STRONG PARTNERSHIPS (continued)
The new long-term incentive (LTI) is based on performance PROMOTING CUSTOMER-CENTRIC BEHAVIOUR against the IDC's long-term objectives as per the development In 2015, we developed a Service Charter that provides a and sustainability index (DSI). In line with emerging local and framework on how to deliver on the IDC mandate through international trends, the award will now vest in three years and enhanced interaction with our customers and adherence to be paid over three years from year of vesting. The amounts for service delivery standards. This includes the steps that we will the subsequent two years will be paid provided the DSI does take when our service fails to meet clients’ expectations. not drop below the target performance level in any of the years. The allocation of awards is discretionary and the Board has the In the period under review, the Charter was implemented authority to change or withdraw the awards. The Board also has and communicated internally through a customer service the discretion to withdraw a vested incentive on the basis of a campaign aimed at acknowledging staff members who material event occurring. rendered sterling service. The new policy was introduced with effect from 1 April In line with putting the customer first, the added bonus of the 2015, and as a transitional measure to support effective customer service campaign was that it showcased employees who implementation, a once-off increased non-pensionable received compliments from clients for offering excellent service. allowance was paid. The allowance will revert to target in the 2017 financial year. In addition, the amount that would have SERVICE EXCELLENCE been payable in 2016 under the previous LTI policy will be paid While still in its infancy, the communication of the Charter has over three years, with the second and third amounts paid at the ensured that the focus on service excellence is a top priority discretion of the Board. and has highlighted the aim of making the client experience seamless and consistent throughout the Corporation’s value The STI is aligned to recognise and reward performance chain, and at all touch points. which exceeds expectations, in terms of short-term corporate indicators, as well as team and individual performance indicators. Encouragingly, we have noted a renewed commitment and The on-target STI amounts have been aligned to that of other passion for customer service from staff who are now going State-owned entities as provided for by the remuneration the extra mile to delight customers. The campaign has gone a guidelines for State-owned entities. long way towards embedding the core elements of the Service Charter, while showcasing people who, on a daily basis uphold In respect of the new LTI, the overall on-target incentive over the excellent customer service. three-year vesting cycle has been aligned with the remuneration guidelines for State-owned entities. We have a good base from which to launch customer service initiatives. A Culture Values Assessment that was conducted In recognising our people, the IDC Star Awards function was among staff members during the period under review, showed held in November 2015 to pay tribute to our “Star” performers as that customer-centricity was one of the desired behaviours. identified and nominated by fellow employees. Understanding In this regard, a customer-centricity workstream has been that teams are also critical to business success, we recognise established to promote the focus on service excellence. teams that have made a difference to various aspects of the IDC and furthered our mission in a positive way. COMPLIMENTS In addition, we maintain our tailored recognition programme In the period under review, we received 84 compliments that e-Wards, which shows our appreciation for staff who go the can be grouped into the following themes: extra mile to serve our clients, both internally and externally. • Excellent interaction with clients; This platform has grown approximately 38% over the last • Ensuring that clients understand IDC products; reporting period and remains a positive means for staff to • Providing solutions; recognise their colleagues. • Professionalism; • Timeous feedback to clients; OUR CUSTOMERS • Responding to customer queries promptly and effectively; and INVESTING IN CUSTOMER SERVICE, ENHANCING • Providing advice and expertise in line with funding needs RELATIONSHIPS of clients.
Customer service is integral to the IDC’s COMPLAINTS operations in ensuring that the Corporation 75 complaints were received. These mainly centred on turnaround achieves high levels of customer satisfaction. times, the reasons for applications being declined and lack of We strive to provide excellent service so that the communication/updates during the application process. customers’ experience of interacting with the SEGMENTATION AND BUSINESS DEVELOPMENT IDC becomes a pleasant and value-adding one. During the period under review, we intensified our business To that end, prompt responses, efficiency and development efforts. One of the initiatives in this regard was quality are among the goals that we have set for the development of a customer segmentation approach that allows for alignment between the Corporation’s objectives all our interactions with our customers. and client needs through a targeted, differentiated service and product offering. In line with our proactive approach and taking the lead in industrial development, we aim to provide our clients with quality products and services. This includes ensuring that we are accessible to do business with, and also that we are continuously working on improving our turn around times.
52 Industrial Development Corporation of South Africa Limited The approach provides for a win-win scenario where we are in a The majority of respondents (81%) are satisfied with our service better position to achieve maximum development impact while offering. This is a notable improvement from last year’s results enhancing interaction with clients and potential clients, leading which pegged the percentage of satisfied clients at 73%. to increased client satisfaction. The desired goal is to add value to clients, bring about sector and market development, and to CUSTOMER WILLINGNESS TO RECOMMEND bring about a consistent, differentiated experience. The focus THE IDC for the next financial year will be the implementation of the The number of respondents who are willing to recommend the customer segmentation initiative to complement as well as IDC to business partners and associates has remained constant improve our business acquisition and retention efforts. at 82%. Of significance is that respondents whose applications were declined indicated that they would recommend us as they CUSTOMER FEEDBACK were advised timeously of the reasons for our decision. This Customer feedback is part of our customer experience indicates that quick feedback remains a key driver of satisfaction, strategy to assist us in improving our service levels at every regardless of its content. touch-point. In this respect, we conduct satisfaction surveys to measure service performance, and identify service issues and Recommending the IDC (%) remedial actions. We have consolidated our intelligence gathering activities to avoid survey fatigue, and a regional stakeholder survey, which we reported on in the past financial year, has thus been included in the short-term survey. Very likely Somewhat likely SHORT-TERM CUSTOMER SATISFACTION SURVEY Neutral This study is aimed at determining service levels among clients Somewhat unlikely Vey unlikely and potential clients who recently interacted with us. This has allowed us, where applicable, to implement corrective actions with speed and thereby address service issues that might have arisen during the interactions. The results from the 904 respondents who participated in the short-term customer satisfaction surveys during the period under review are reflected in the survey findings below. OPPORTUNITIES FOR IMPROVEMENT IN IDC Respondents per region SERVICE DELIVERY We are pleased to note that the number of respondents who Share of reported that they are satisfied has increased significantly, from Region respondents (%) 25% in the last financial year to 47%. Although there has been Eastern Cape 8 an increase in the percentage of clients highlighting turnaround Free State 3 times as an area for improvement, fewer respondents have cited communication, information requirements and staff expertise as Gauteng 42 issues that need attention. KwaZulu-Natal 13
Limpopo 7 Improving service (%) Mpumalanga 4 North West 6 Northern Cape 3 Western Cape 13 Happy, no comment Rest of Africa 1 Turnaround time Communications CUSTOMER SATISFACTION WITH SERVICE Information requirement Staff knowledge DELIVERY
Overall service (%)
Very satisfied Somewhat satisfied Neutral Somewhat dissatisfied Vey dissatisfied
2016 Integrated Report 53 2 PERFORMANCE AND IMPACT
COMMITTED TO GOOD GOVERNANCE
Ethical business practice is essential for the long- To improve our clients’ understanding of sound corporate governance practices, we developed a customised nominee term performance and sustainability of IDC’s directors’ training course which places a special emphasis on business and to protect and enhance the key three elements: achievements, challenges and continuing focus • Directors’ fiduciary duties and acting in the best interests of area interests of our stakeholders. the company • An awareness of the IDC’s objectives Compliance with legislation and the application of best practice • Practical implications of being a director principles are integral to the IDC. To ensure that effective A total of six training sessions of two days each were held, and governance and the highest standards of ethics are maintained, they were highly rated by all 132 employees who attended the we strive to foster a culture within the organisation that is sessions. based on fairness, transparency and accountability. We believe that in addition to being compliance-driven, ethical behaviour An increased focus will be placed on corporate governance should be underpinned by a culture of ethics. We are guided by assessments of investee companies during the coming year, and and comply with the Corporation’s enabling act, the Industrial we will continue to provide directors’ training. Development Corporation Act 22 of 1940 (IDC Act), the Public Finance Management Act 1 of 1999 (PFMA), the Treasury BOARD OF DIRECTORS Regulations, Companies Act 71 of 2008 and the principles of good corporate governance as contained in the King Report on COMPOSITION Corporate Governance for South Africa 2009 (King III). A table The IDC’s Board is constituted to ensure the wide range of skills setting out IDC’s compliance with King III appears on our and knowledge necessary to meet the Corporation’s strategic website in section 5 of the Integrated Report. objectives. The size of the Board is determined by the IDC Act, which KEY GOVERNANCE INITIATIVES FOR THE YEAR permits a minimum of five and a maximum of 15 directors to In 2015, the IDC undertook a strategy prioritisation exercise, be appointed by the shareholder. A unitary Board structure is Project Evolve, designed to increase the impact of the applied, with the majority being independent non-executive Corporation. The exercise also sought to enhance the directors. As at 31 March 2016, the Board comprised one Corporation’s operating model and internal systems and executive and 10 non-executive members and a gender processes. To that end, a number of corporate governance composition of six female and five male directors. The positions initiatives were undertaken, which are summarised in the of Chairperson and Chief Executive Officer are separately held to table below. ensure a clear separation of responsibilities. The Chairperson of the IDC Board is an independent non-executive director, in line Updated Board The Board Charter was updated to facilitate with the recommendations of King III. Charter implementation of the Project Evolve The IDC Board’s ultimate responsibility is to maintain oversight initiative. of performance, while providing strategic direction to the Revised The Delegation of Authority Matrix was Corporation. The Board accounts to the shareholder and is Delegation revised and simplified in order to ensure responsible for formulating strategic objectives and key policies, of Authority the efficient and optimal use of senior major plans of action, a risk policy, annual budgets and business Matrix management’s time. plans. It ensures that the shareholder’s performance objectives Corporate The assessment of the level of corporate are achieved through performance monitoring systems and Governance governance application by our investee reporting. Assessments companies has been escalated with All new directors participate in a formal induction process of Investee 50 companies having been assessed as at coordinated by the Company Secretary. The induction process Companies 31 March 2016. includes briefings on financials, strategic, operational and risk Directors’ An IDC-customised directors’ training course management policies and processes, governance framework, training was developed and implemented. culture and values, and key developments at the IDC and in the sectors and environments in which the IDC operates. BEE Training Training sessions on the amended BEE Codes of Good Practice and their importance for Directors have complete access to senior management through IDC investee companies were provided to the Chairperson, CEO or Company Secretary at any time. our nominee directors. In addition to regular presentations by senior management Ethics Ethics awareness training sessions were at Board meetings, directors may seek briefings from senior Awareness provided to employees to strengthen our management on specific matters. Training culture of ethical behaviour. CHANGES TO THE BOARD Our programme of corporate governance assessments of All non-executive directors of the IDC Board retired at our investee companies has shown that the application of corporate Annual General Meeting on 23 March 2016. The reappointment governance practices by our investee companies in general, of the following directors was accepted and approved until the and by start-up and entrepreneurial businesses in particular, next Annual General Meeting: Ms Busisiwe Mabuza, Mr Brian are below the required standard. Corporate governance of our Dames, Ms Philisiwe Mthethwa, Ms Lael Bethlehem, Mr Bobby investee companies was accordingly our main focus area from a Godsell, Dr Sizeka Magwentshu-Rensburg, Ms Nomavuso corporate governance perspective during the year under review, Mnxasana, Ms Noluthando Orleyn, Mr Brian Molefe and and it will remain a major focus area during the coming year. Mr Nimrod Zalk.
54 Industrial Development Corporation of South Africa Limited Two new Board members were appointed with effect from COMPANY SECRETARY 1 April 2016, namely Ms Matshepo More, Chief Financial Officer The Company Secretary plays a pivotal role in the corporate of the Public Investment Corporation, and Mr André Kriel, governance of the Corporation. The Company Secretary is General Secretary of the Southern African Clothing and Textile responsible to the Board for, inter alia, acting as a central Worker's Union. source of information and advice to the Board on matters of The Minister for Economic Development announced the ethics, adherence to good corporate governance principles, reappointment of Ms Busisiwe Mabuza as the Chairperson of and compliance with procedures and applicable statutes the IDC Board, and he thanked Mr Zwelinzima Vavi, whose term and regulations. ended at the end of February 2016, for his contribution to the The Company Secretary is not a director of the Corporation Corporation. and acts independently from it, maintaining an arm’s length relationship with the Board. In line with good governance BOARD CHARTER practice, the appointment and removal of the Company The Board has a charter which sets out its responsibilities, Secretary is a matter for the Board. including the adoption of strategic plans, the development of a clear definition of materiality, the monitoring of operational The current Company Secretary, Mr Bassy Makwane, discharges a performance and management and the determination of dual role in that he is also the General Counsel of the Corporation. policy processes to ensure the integrity of the Corporation’s risk management and internal controls, communication policy, and director selection, orientation and evaluations. The Board Charter was revised during the year under review in order to facilitate the implementation of the Project Evolve recommendations and spell out its impact on the way that Board members are expected to perform their duties. Particulars of the revisions are summarised as follows: • The terms of reference of the various Board Committees have been updated, and terms of reference of the newly constituted Social and Ethics Committee have been added • Delegation of authority by the Board to certain committees, with reference to powers to borrow or issue guarantees, indemnities or securities, or to enter into transactions that bind the Corporation to future financial commitments in terms of the PFMA, have been clarified
ETHICS AND MANAGING DIRECTORS’ CONFLICTS OF INTERESTS The Board, subsidiary directors and executive management are required to disclose any potential conflicts of interest at regular meetings and, as and when necessary, to the Company Secretary. This is done in line with the guidance provided by section 75(4) of the Companies Act and in accordance with the IDC’s Guidelines on Conflict of Interest. Such declarations occur at each Board meeting, including meetings of the Board committees whose responsibility it is to consider transactions. Transactions that place a Board member in a potential conflict of interest are submitted to the Social and Ethics Committee for deliberation and, thereafter, to the Board for final decision. Further particulars of the IDC’s Code of Ethics and Business Conduct, Conflict of Interests Policy, Gifts Policy, and other ethics-related matters are available on our website in section 5 of the Integrated Report.
2016 Integrated Report 55 2 PERFORMANCE AND IMPACT
COMMITTED TO GOOD GOVERNANCE (continued)
GOVERNANCE FRAMEWORK STRUCTURE All members of Board Committees are non-executive directors. The various Board committees were revised at our Annual General Meeting on 23 March 2016. An indication of the current committee membership is provided as part of the information on the Board of directors on pages 12 to 15. The IDC’s Board structure including the committee membership as it applied during the reporting period is depicted in the diagram below.
IDC BOARD
Responsible for the performance of the Corporation while retaining full and effective control
Board Investment Board Human Capital Board Audit Board Risk and Social and Ethics Committee and Nominations Committee Sustainability Committee Committee Committee
Considers transactions Develops compensation Monitors the adequacy Governs risk and ensures Promotes the ideals of mandated to it policies, plans and of financial controls and responsible stewardship corporate fairness and by the Board and performance goals reporting of sustainability transparency, assists reviews related party the Board in vetting transactions. Particulars funding applications, of approval thresholds projects and any matter are provided in the in which a director of diagram on page 57. the IDC has an interest
Dr Sizeka Magwentshu- Brian Dames Nomavuso Mnxasana Lael Bethlehem Philisiwe Mthethwa Rensburg (Chairperson) (Chairperson) (Chairperson) (Chairperson) (Chairperson) Ms Lael Bethlehem Ms Busi Mabuza Dr Sizeka Magwentshu- Mr Brian Dames Ms Thandi Orleyn Mr Brian Molefe Mr Zwelinzima Vavi* Rensburg Mr Zwelinzima Vavi* Mr Nimrod Zalk Ms Philisiwe Mthethwa Mr Bobby Godsell Mr Bobby Godsell Ms Nomavuso Mnxasana Mr Zwelinzima Vavi* Mr Nimrod Zalk Ms Thandi Orleyn Mr Brian Molefe Ms Philisiwe Mthethwa Ms Thandi Orleyn
* Member of respective committee until 29 February 2016
Further particulars of the mandate of each Board Committee and of Further particulars regarding the remuneration of directors the work done by the committees during the year under review, are and senior managers are provided in note 33 to the Annual provided on our website in section 5 of the Integrated Report. Financial Statements, on pages 143 to 145 in section 4 of this Integrated Report. REMUNERATION REPORT The IDC’s remuneration philosophy is covered in detail on The Human Capital and Remunerations Committee plays an page 53 of this report. advisory role regarding the remuneration of IDC Non-executive directors. The directors are remunerated for the meetings they DELEGATED LEVEL OF AUTHORITY attend at rates approved by the shareholder. No performance- While the Board has the authority to delegate powers to executive based remuneration or retainer fees are paid to directors. Senior management and Board committees, it remains accountable to management and other employees are paid market-related salaries the shareholder. A delegation of authority is in place, which is as well as through the IDC short and long-term incentive schemes, updated on a regular basis, and was extensively revised during based on performance and the achievement of specific set targets. the year under review as part of a concerted effort to ensure the During the reporting period, IDC directors were remunerated efficient use of senior management’s time. The major changes to as follows. the Delegation of Authority Matrix include: 2016 2015 • The introduction of a Post-Investment Committee to deal with Name of director R’000 R’000 certain post-investment matters, instead of submitting them to Ms BA Mabuza 690 532 the committees that granted the original investment approval; Ms LI Bethlehem* 301 486 • The Divisional Executives’ burden of dealing with requests Mr BA Dames 322 299 and/or memos has been reduced by ensuring that those matters which can be adequately dealt with by Departmental Mr RM Godsell 178 259 Heads and Managers are allocated appropriately; and Dr SM Magwentshu-Rensburg 326 335 • The number of signatories has been reduced and this will limit Ms NP Mnxasana 441 – decision-making to those who are accountable. This will avoid Mr B Molefe** 64 – delays and reduce inefficiencies. Ms PM Mthethwa 304 351 Ms ND Orleyn 340 DELEGATION OF CREDIT APPROVAL Mr ZJ Vavi 288 158 As depicted in the diagram alongside, specific powers and authority Mr NE Zalk*** – – have been delegated to those Board and executive committees responsible for credit approvals. Each of these committees has a * Ms LI Bethlehem’s fees are paid directly to her employer, HCI. ** Mr B Molefe did not derive any financial benefit from services rendered to the clearly defined mandate outlined in written terms of reference. The IDC. His fees were paid directly to the Transnet Foundation. management of day-to-day operations is delegated by the Board to *** Mr NE Zalk is employed by the Department of Trade and Industry (dti) and the Chief Executive Officer (CEO), who is assisted by the Executive directors’ fees are not paid for services rendered to the IDC. Management Committee (EXCO) and its subcommittees.
56 Industrial Development Corporation of South Africa Limited • Considers transactions where the transaction is R1.5 billion or more or counterparty exposure is Board R7 billion and above • The investment is of a strategic nature • There might be a conflict of interest through an IDC director’s involvement in a transaction (after taking advice from the Social and Ethics Committee, Board Investment Committee (BIC) and/ or EXCO Credit) • Deviation from any policy relating to a finance transaction (where Board approval is required) • Counterparty limits of above R7 billion per counterparty at cumulative market value (including undrawn commitments)
Board Investment • Considers transactions where the IDC’s transaction exposure (new money plus old if within a Committee rolling 12‑month period) is R250 million or more but less than R1.5 billion and the counterparty exposure is from R1 billion up to R7 billion • Also reviews related party transactions involving members of the IDC Board and transactions where the transaction/counterparty limits are breached, but recommends to the Board for approval • Decides on whether a finance transaction is of a strategic nature, in which case the transaction will be reviewed by the BIC, but recommends to the Board for approval • A sector and/or regional limit is breached
Special Credit • Considers transactions where the IDC’s transaction exposure (new money plus old if within a Committee rolling 12‑month period) is R25 million or more but less than R250 million and the counterparty exposure is below R1 billion • Considers additions/changes to the delinquent register • Considers related party transactions involving members of the IDC Board irrespective of the quantum of the application but recommends to the Social and Ethics Committee and/or BIC and Board for review/approval
Credit Committee • Considers transactions where the IDC’s transaction exposure (new money plus old if within a rolling 12-month period) is less than R25 million and the counterparty exposure is below R250 million
COMPLIANCE INTERNAL AUDIT FUNCTION Some of the important pieces of legislation that influence the THE ROLE OF INTERNAL AUDIT (IA) IDC’s business activities include the PFMA, the IDC Act, the The primary objective of IA is to provide independent, objective Financial Intelligence Centre Act and the Promotion of Access assurance to the Board that the IDC’s governance processes to Information Act. and its management of risk and systems of internal control The past financial year was the first that our Compliance and are adequate and effective in mitigating the most significant Regulatory Affairs Department, which was established with risks that threaten the achievement of the Group’s objectives. effect from 1 April 2015 as part of the implementation of Ultimately in so doing, this improves the control culture of the Project Evolve recommendations, was in operation. Prior the Corporation. to this, compliance operated as a function within the IDC's IA is responsible for developing a three-year rolling audit legal department. plan, approved by the Board and Audit Committee (BAC) In line with the King III recommendations, a risk-based approach using a risk-based methodology. The IDC’s internal control has been adopted that will serve as the cornerstone of framework mirrors that set out by the Committee of Sponsoring compliance roll-out in the organisation. Organisations of the Treadway Commission (COSO). Under the COSO ERM Framework, risks are categorised into strategic, The department commenced its activities with the approval, operational, financial reporting, and legal/regulatory risk by the IDC Board, of a Compliance Policy in addition to various categories. other policies, procedures and operational systems. A process of compliance awareness training to IDC employees was embarked In addition to the normal audit activities, IA is also responsible on, and the Compliance Department will continue to forge for the performance of fraud, corruption and related ties with internal and external stakeholders during the current irregular behaviour investigations as well as facilitation of year. There were no contraventions, penalties, sanctions or fines the development and revision of systems and procedures imposed on the IDC due to non-compliance with regulatory throughout the Corporation. requirements. We recognise our accountability to our clients and we are committed to protecting the confidentiality of their information as required by relevant applicable regulatory requirements.
2016 Integrated Report 57 2 PERFORMANCE AND IMPACT
COMMITTED TO GOOD GOVERNANCE (continued)
KEY FOCUS AREAS FOR THE PAST YEAR: AUDIT CHALLENGES, ACTIVITIES AND INITIATIVES AND FORENSICS DURING THE YEAR IA has performed over 83 assignments during the year under review, comprising both IA reviews and forensic investigations – Challenges Internal Audit response to this a number similar to that of the previous financial year. Inherent challenges Working with the IDC legal An analysis of the results of these assignments has led IA to the pertaining to clients’ department to enforce the IDC’s conclusion that the IDC’s control environment is adequate and cooperation during rights to access client information operating as intended, with the exception of persistent risks in forensic investigations during investigations relation to external fraud and, in particular, the misapplication Long lead time in finalising Management, communication and misappropriation of funds disbursed by the IDC to clients. investigations and education of stakeholders with regards to challenges and FRAUD PREVENTION expectations BACKGROUND Global and local adverse Ongoing fraud awareness In its basic form, corporate fraud and corruption prevention economic climate which messages through various entails never condoning fraud or corruption of any kind, may result in increased platforms including the IDC providing fraud and corruption awareness and prevention incidents of fraud and website to educate the public on training for employees, ensuring strong internal controls, and corruption fraud activities limiting exposure to fraud and corruption through a robust detection, investigation and prevention programme. These During the year under review, the fraud awareness training interventions inform the pillars upon which the IDC corporate sessions conducted by IA continued to be the main tool in fraud and corruption prevention strategy is built. mitigating incidents of financial crime by IDC employees. In addition to this, the IDC posted a message on its website to The IDC takes a holistic view of fraud and corruption prevention, make the public aware that fraudsters are going to great lengths realising that fraud and corruption penetrates to the very soul of to mislead members of the public into believing that they are a corporation and that an empowered employee is the key to a dealing with IDC officials. successful fraud and corruption prevention programme. To this end the IDC maintains: Furthermore, the continued communication of the IDC Code of Ethics and Business Conduct is also designed to mitigate • A robust fraud prevention policy, plan and response plan incidents of financial crime by IDC employees. • An anonymous reporting hotline through the independently managed “Tip Offs” service The communication on matters investigated to IDC employees • A well-developed and properly communicated Code of Ethics during training sessions further reinforces the IDC’s zero- and Business Conduct, which includes a conflict of interest tolerance stance towards financial crime as well as sending policy and an accompanying procedure for the declaration out the message that any incident will be detected and dealt of interest with. IA has extended the communication to our clients by • Regular fraud and anti-corruption education and awareness distributing a Financial Crimes Awareness Brochure to educate road shows throughout the Corporation, including the them on fraud-related matters as well as the implications of regional offices, focusing on recent cases, legislative being a party to them. developments and red flag awareness Over the past financial year management has restructured the • The distribution of Financial Crime Awareness pamphlets to clients and other stakeholders, with a distinct anti-corruption post-investment management environment to focus on key message activities such as client visits and improvements in the funding • Fraud and anti-corruption awareness training during the on- review process. The strong internal control environment, boarding training of new employees coupled with the tone adopted at the top, is testament to • Targeted additional training to specific SBUs and departmental management’s commitment to curtailing unsavoury practices. heads with a high exposure to fraudulent activities Although progress has been made in dealing with fraud, we • The naming and shaming of employees found guilty at remain concerned by the extent of the fraud and corruption- disciplinary hearings for having been involved in instances of related matters being reported. Despite our communicating a irregular behaviour or activities zero-tolerance approach towards fraud and related untoward • The placing of those who have participated in acts of fraud behaviour, clients continue to test preventative controls in all and corruption, either internally or externally, on the IDC manner of ways in the hope that a lack of integrity within the Delinquency Register system may allow for irregular gains to accrue to them. Poor In accordance with the IDC Fraud and Corruption Prevention ethical decision-making by clients remains a constant trend. Policy, all requests for forensic investigations, from whatever While incidents of untoward activity by clients persist, they are reporting channel, have to be approved for investigation by being identified earlier and the number of matters reported for the CEO, with the noting of the General Counsel. The policy, investigation has marginally dropped from the previous financial however, gives the Board the final authority to sanction and year, as can be seen in the graph alongside. Total investigations LA approve investigation if they are of the view that the CEO or for the year were 22 of which 16 were client-related. Efforts senior management might be implicated. The outcomes of to engage employees and clients on fraud education and forensic investigations are presented to the IDC Executive awareness training during the year appear to have contributed Committee and the IDC Board Audit Committee which to this decrease. is responsible for the approval of the recommendations contained therein.
58 Industrial Development Corporation of South Africa Limited RISK MANAGEMENT FRAMEWORK Number of matters reported for investigation The IDC’s ERM Framework is based on the
principles embodied in the PFMA, the Public Sector Risk Management Framework published by National Treasury, the Enterprise Risk
Management Framework published by COSO of the Treadway Commission, the International Guideline on Risk Management (ISO 31000) and King III. The principles outlined in our ERM framework are incorporated into risk management-related policies and procedures that support it. The objective of this framework is to embed a uniform approach to ERM at the IDC and to ensure that all risks that could affect the achievement of our objectives with respect to people, reputation, business processes and systems, and financial and environmental performance, are identified, assessed and treated appropriately and at an acceptable level. Internal External Total ANNUAL RISK ASSESSMENT An assessment of risks faced by the IDC is undertaken annually. This process provides the identification, measurement and management of the critical risks (see page 60) that we may face LA IA also assesses key operational areas for corruption risks. so that we are able to formulate appropriate risk strategies and This resulted in 11 out of 16 (69%) of such high risk areas action plans. being assessed during 2016. High risk areas include all operational units (12 SBU’s), Financial Management department, THE IDC’S RISK ASSESSMENT PROCESS Procurement, Human Capital and Post-Investment Management The components of the IDC’s risk assessment process are department. During this risk identification process, the illustrated in the diagram on page 60 and are explained below. significant risks identified were fed back into IA’s fraud and corruption training activities. ESTABLISHING THE RISK ASSESSMENT CONTEXT This aspect provides perspective and assists with understanding LA The anti-corruption and anti-fraud training material was the nature of the impact of the risk on the business, including distributed in the form of a leaflet to all IDC employees and the critical strategic, financial, governance, operational and IT 46% of IDC’s clients. 43 sessions were held with 425 out of governance risks we face. 957 employees (44%) receiving communication on anti- corruption and anti-fraud. The 957 employees comprised of RISK ASSESSMENT 848 permanent employees, 106 interns and three consultants. The risk assessment process enables management to gain 316 out of 957 employees (33%) received face-to-face training an understanding not only of the probability that a risk may on anti-corruption and anti-fraud. A further 178 employees materialise but also its impact on the Corporation. The risk attended more than one presentation during a fraud awareness assessment methodology provides management with a week held during the year with 109 employees (11%) attending portfolio view of risks (i.e. a “risk profile”). The risk assessment only one presentation. 100% of governing bodies (Executive process is broken down into the following phases: members) received communication regarding anti-corruption policy and procedure, with 50% receiving training thereon. • Risk identification – the process of considering the causes and sources of the risk, and its positive and negative During 2016, the following significant risks were noted during consequences the investigations: • Risk analysis – the process of considering the risk’s potential LA • Duplicate invoicing positive and/or negative consequences, and the probability of • Cancelling invoices after payment received those consequences occuring • Falsified contract • Risk evaluation – the process which compares the risks against • Misappropriation of funds risk evaluation criteria, resulting in a map of risk priorities • Use of alternate bank account instead of joint bank account • Falsified invoicing Risk treatment • Related party transactions The objective of risk treatment is to determine how the IDC • Falsified IDC documentation/letters should respond to events and associated risks. The IDC’s risk • Use of fictitious IDC email address response strategies can broadly be categorised as follows: • Receiving benefit to act or omit to act in an unlawful manner • Terminate: eliminate, redesign, avoid or substitute the threat • Transfer: where possible and advantageous move the threat We maintain a zero-tolerance stance with regard to all instances to another party of fraud and corruption, and we regard this as non-negotiable. • Treat (further): mitigate or control the threat by Promoting high ethical standards and combatting corruption implementing additional measures to reduce the likelihood throughout our sphere of influence is an important aspect of and/or consequence before the threat materialises our drive to deliver social value through our core activities as a • Tolerate: retain the threat after careful consideration of its developmental institution. consequences for a predefined duration
2016 Integrated Report 59 2 PERFORMANCE AND IMPACT
COMMITTED TO GOOD GOVERNANCE (continued)
Risk reporting and escalation It is important to keep the Board, executive management, the Board Risk and Sustainability Committee and the Board Audit Committee abreast of key risks and the actions resulting from risk management activities. This component of the framework outlines the process for reporting risk management information to these governance entities on a consistent and timely basis.
The IDC’s risk assessment process
Enterprise risk management process
Establishing the context
Risk assessment
Risk identification Reporting, communication Monitor and and Risk analysis review consultation
Risk evaluation
Risk treatment
Process for managing risk
Monitor and review Monitoring refers to the consistent application of the ERM Framework across the Corporation, the effectiveness of the ERM policies and procedures, as well as the identification of weaknesses demanding corrective action.
Communication and consultation Effective communication and consultation increase the awareness of the Risk Management Programme. Awareness campaigns, training and education sessions, and newsletters were widely disseminated to employees throughout the Corporation.
60 Industrial Development Corporation of South Africa Limited ERM Our risk assessment process identified the following as the major risks that could have a material impact on us achieving our objectives.
Risk name Risk description Consequence Risk mitigation Macro-economic The risk of macro-economic Downgrading of the IDC’s This risk is managed by the IDC’s conditions conditions impacting the IDC’s credit rating resulting in Research and Information Department, business, including weak domestic increased borrowing costs which conducts regular analysis of and or export demand and overall economic, political and legal events fixed investment activity and reports each potential implication and internal interventions to EXCO and the Board Proactive new business The inability to proactively source Inability to implement Proactive industry development generation new business new strategy and failure strategies to deliver on mandate Delivery and execution The risk of the Corporation Could lead to adverse This risk is mitigated, among other failing to deliver and execute on reputation and complaints things, by a robust Customer stakeholder expectations from stakeholders Relationship Management (CRM) Programme Business continuity risk Adverse events that impact the Complete business This risk is allayed by having the organisation’s ability to operate interruption necessary business continuity plans in or resume operations, following a place and ongoing Disaster Recovery major business disruption Plan testing Credit risk The risk resulting from non- Increasing impairments This risk is managed through quarterly payment by the IDC’s business and write-offs Investment Monitoring Committee partners and non-recoverability meetings, which ensures that of investments appropriate intervention strategies are in place to monitor the risk Winning organisational The risk of culture, behaviour, Poor customer focus and This risk is mitigated by conducting culture values and change in mind-set low staff morale cultural awareness sessions and not being aligned to deliver on constant employee engagement mandate or strategy Ethical conduct and Consists of all forms of internally Could result in financial This risk is alleviated by fraud and behaviour and externally conducted theft losses to the IDC as well as ethics awareness training as well as the or fraudulent activities including reputational damage activities of the Governance and Ethics unethical business practices Committee, among others and behaviour Legal and regulatory This is the risk of the IDC not Potential litigation Some of the key controls in place to compliance meeting its legal and regulatory mitigate this risk include the Legal requirements across the various Department’s systems and procedures industries and countries of as well as the Compliance Manual operation and policies Alignment of IDC The risk of non-alignment of Poor performance and This risk is managed by existing processes and IDC processes and infrastructure non-achievement of documented processes and a review infrastructure to to strategy strategic objectives of systems and procedures in line with strategy the Project Evolve strategy Financial sustainability The risk that the IDC’s financial Could result in the This risk is managed by adopting a strength can be impacted by IDC failing to meet its prudent borrowing policy and the funding availability, concentration mandate and in turn its quarterly analysis of the IDC’s listed risk, income dependence development objectives investments, amongst others and portfolio and investment performance Human capital capacity The risk of not having adequate Could result in the IDC This risk is mitigated by retention human capital resources to deliver not being able to execute strategies, i.e. competitive on IDC strategy its mandate remuneration packages, performance bonuses and personal development programmes
2016 Integrated Report 61 2 PERFORMANCE AND IMPACT
COMMITTED TO GOOD GOVERNANCE (continued)
Risk name Risk description Consequence Risk mitigation Stakeholder The risk of the IDC not responding Could lead to loss of This risk is mitigated by stakeholder expectations risk to stakeholder needs stakeholder support engagement as well as presentations to the relevant Parliamentary Portfolio Committees on IDC strategy Dependence on an The risk that factors in the external Could lead to IDC This risk is primarily mitigated by enabling environment environment impact the IDC’s investments not achieving economic analysis and forecasting ability to do business budgets Subsidiary delivery and The viability of subsidiaries and Could result in a financial This risk is mitigated through performance risk their ability to deliver effectively loss for the IDC monitoring by Board representation Shareholder The Economic Development Should this risk materialise, This risk is allayed mainly by receiving representative loses Department may lose confidence it could lead to ministerial input in IDC strategy confidence in the and credibility in the IDC government policies not sessions and the approval of the IDC’s ability to achieve being implemented corporate plan mandate Insufficient The risk of IDC’s inability to Should this risk materialise, This risk is mitigated by the Black participation by black implement government strategy it could perpetuate Industrialist Programme of the IDC, industrialists in the regarding black industrialists inequality in the South including a corporate target for economy African economy funding to black industrialists Carbon taxes paid by The risk of the high impact of the Could result in reduced This risk is mitigated by the the IDC’s subsidiaries cost of carbon taxes payable by dividends due to the IDC introduction of energy-efficient and associates IDC subsidiaries and associates measures at the IDC as well as at subsidiaries’ and associates’ buildings The maturity of the A lack of a proper three lines of Could lead to red-tape This risk is mitigated by combined IDC’s Risk Management defence framework (bureaucracy within the assurance by the independent Architecture Corporation) and slow Internal Audit, Risk Management and delivery to clients Compliance Departments Volatility in listed share The value of the IDC’s listed Involves the decline of the This risk is alleviated chiefly by portfolio investments declining IDC’s capital and reserves monitoring and reporting of the listed and could have an adverse share portfolio by the Post-Investment impact on the IDC’s rating Management Department and by initiatives to diversify the portfolio Electricity supply This is the risk facing the IDC’s Could result in slow There is no control over this risk, but investments as a result of economic growth and loss actions to mitigate its effects can be unreliable electricity supply of output due to forced considered including funding provided production stoppages by the IDC for renewable energy which could adversely investments impact the IDC book Industrial action Labour market volatility at Could result in loss of This risk is mitigated principally by investee companies production and income labour relations training for staff for investee companies at investee companies and active workplace forums
The IDC continuously scans the environment for emerging risks and the following were identified as new risks that will be added to the risk register: • The risk of potential credit rating downgrades on SA’s sovereign credit rating • The risk of water security/drought impacting IDC clients/investments • IT security risk – the risk of unauthorised access to information could lead to information being compromised • Commodity price risk • Monitoring of safety risks by mining clients • The risk of regulatory fines levied against clients in foreign jurisdictions • Debt and equity pricing
62 Industrial Development Corporation of South Africa Limited OPERATIONAL RISK MANAGEMENT The IDC has a robust credit and investment risk management Given the changing risk landscape and adoption of the new process which encompasses, among other things: Evolve strategy, Risk and Control Self-Assessments (RCSAs) of all • A robust due diligence process that is performed by an departments were reviewed. interdisciplinary team of financial, technical, marketing, and legal specialists RCSAs are a key components of the operational Risk • A credit risk assessment process that is independent of the Management Framework and enable a dynamic due diligence and business generating team • Executive credit approval committees that include external experts and iterative process for identifying and assessing • Internal monitoring committee meetings to monitor remedial key operational risks and controls. Mitigating actions and make certain that they are timeously undertaken actions were also put in place to proactively in order to ensure an improvement in the quality of the book • Our Post-Investment Management department – responsible address and control identified deficiencies. for managing the portfolio during the life of each transaction • The monitoring of country risk exposure and the reporting of Another key focus area for the operational risk team during this to the Board by the Risk Management Department the year under review was the implementation of the Loss Data Collection (LDC) policy. LDC provides an overview of Non-performing loans (NPLs) are defined as total capital the operational risk environment in terms of the risks that are outstanding (excluding commitments) for facilities with capital actually materialising (losses incurred) and the adequacy of repayments in arrears of more than 90 days. Capital at Risk controls. In realising the LDC policy, operational losses and near- (CaR) is defined as the total capital outstanding (excluding miss events are identified and analysed. Action plans are then commitments) for facilities with capital repayments of more than developed to address control weaknesses and prevent further 60 days in arrears. As at 31 March 2016, approximately R5.7 billion losses from recurring. (2015: R5.4 billion) was classified as non-performing loans and R5.9 billion was classified as CaR (2015: R5.8 billion). BUSINESS CONTINUITY MANAGEMENT (BCM) The biggest contributors to both NPLs and CaR in this financial During the year under review, BCM plans were developed year were clients and business units that were impacted by the and will be ready for testing in the coming financial year. The slump in the commodity prices. As a result of interventions to Business Continuity Management Forum is responsible for our contain an increase in the non-performing book, the workout BCM programme, and BCM awareness sessions were conducted and restructuring book remained fairly static at approximately to further embed a culture focused on business continuity. R10.5 billion (2015: R10.6 billion). CREDIT RISK PROFILE The various interventions outlined here, and our efforts to The level of impairments has increased from R10.2 billion in improve our collections rate, are expected to lower the loans March 2015 to R11.8 billion as at 31 March 2016, with impairments that have been categorised as non-performing. on equity investments accounting for approximately 73% of the INTERNAL RATING AND PRICING MODELS total impairments raised. The impairment charge to the income statement this year was R3.6 billion, compared to the prior year We have developed new rating and pricing models which are charge of R1.8 billion. aligned to our risk profile and portfolio. The output of the rating model will be used as an input into the pricing solution and will The ratio of impairments, as a percentage of the portfolio at also be used for portfolio monitoring. The pricing tool will be cost, increased from 16.7% in March 2015 to 16.9% as at 31 March used to price all deals. 2016. Over the period 2012 to 2016, the IDC impairment levels are aligned to our risk appetite, and our developmental role in filling VALUE OF THE NEW MODELS TO THE IDC the market gap and facilitating funding mechanisms to sectors In addition to providing transparency and the possibility of and businesses that are deemed to be riskier for mainstream analysing the trade-off between risk costs, development commercial banks. The trend also reflects our renewed focus on impact and financial performance, the new models also allow funding early-stage projects and start-up operations. management to have appropriate discussions concerning The increase in impairments in the current financial year was such trade-offs. attributed to the adverse macro-economic environment and The new models provide a good foundation for better decisions the protracted slump in commodity prices. The impact of the in managing the overall portfolio in terms of our objectives, weakening Rand, interest rate hikes and the drought also had including our development goals. a negative impact on some of our exposures. In response to the higher risk of the IDC book, we have embarked on various Improved transparency will also provide the basis for appropriate initiatives to contain any further increases in impairments. We are discussions around performance measurements on both a deal confident that these interventions will be effective in curbing and portfolio level in relation to our mandates. the growth in impairments. We expect to introduce our new models during 2017.
2016 Integrated Report 63 2 PERFORMANCE AND IMPACT
IMPACT ON FINANCIAL SUSTAINABILITY
THE IDC IS SELF- SUSTAINING THROUGH: IDC FUNDING MODEL • BORROWINGS • RETAINED EARNINGS Internal profits
Divestment of mature LOAN FUNDING EQUITY FUNDING investments
Borrowing in the domestic and Dividend Capital growth Interest payments Capital payments international markets receipts and realisation
SUPPORTED BY: Risk management | Asset and liability management | Forecasting and scenario analysis
The IDC is a going concern. Due to the current state of the Managing impairments, however, is key to ensuring our financial economy we expect profitability to be under pressure in sustainability. We have implemented and will continue to the short to medium term. Our efforts to ensure sustainable implement initiatives to ensure that impairments remain within development in the South African economy require that the acceptable levels. Corporation remains financially sustainable. The Board has emphasised that in order to implement the We have sufficient liquidity to meet our current obligations 2017 to 2019 corporate plan, and all the approved initiatives and are confident that, for the foreseeable future, we can raise to continue our operations, we will need to remain a going enough funding through a combination of new debt and concern and financially sustainable. internally-generated funds (profits, repayments on existing As a result, we regard financial sustainability as a material matter. facilities or equity divestments) to invest in new advances into the economy.
Five-year financial overview – extract from the Company’s Annual Financial Statements
Figures in Rand million 2016 2015 2014 2013 2012 Statement of financial position Cash and cash equivalents 6 183 7 714 7 250 8 043 7 117 Loans and advances 23 451 21 760 20 298 18 297 15 070 Investments 91 430 94 198 108 943 98 437 93 565 Property, plant and equipment 166 129 120 121 110 Other assets 1 195 1 348 994 865 356 Total assets 122 425 125 149 137 605 125 763 116 218 Capital and reserves 78 000 84 860 99 869 90 909 89 065 Other financial liabilities 38 987 33 566 29 017 25 655 17 814 Other liabilities 5 348 6 723 8 719 9 199 9 339 Total equity and liabilities 122 425 125 149 137 605 125 763 116 218 Statement of comprehensive income Operating profit/(loss) 152 1 718 1 953 1 704 2 228 Income from equity-accounted investments – 3 2 (1) (6) Profit before taxation 152 1 721 1 955 1 703 2 222 Taxation 25 (54) (551) (183) (29) Profit/(loss) for the year 177 1 667 1 404 1 520 2 193
64 Industrial Development Corporation of South Africa Limited Five-year financial overview – extract from the Group’s Annual Financial Statements
Figures in Rand million 2016 2015 2014 2013 2012 Statement of financial position Cash and cash equivalents 6 865 8 257 7 877 9 009 7 825 Loans and advances 23 928 22 412 20 818 18 666 15 978 Investments 71 586 73 114 92 337 84 116 80 231 Property, plant and equipment 10 626 9 921 9 012 7 913 4 772 Other assets 8 343 8 585 8 549 7 181 3 424 Total assets 121 348 122 289 138 593 126 885 112 230 Capital and reserves 84 717 89 797 106 769 96 766 91 862 Non-controlling interest 102 125 215 174 331 Other financial liabilities 27 984 24 005 21 350 19 025 9 923 Other liabilities 8 545 8 362 10 259 10 920 10 114 Total equity and liabilities 121 348 122 289 138 593 126 885 112 230 Statement of comprehensive income Operating profit/(loss) (494) 1 011 2 513 2 447 3 412 Income from equity-accounted investments 557 656 (310) (466) (2) Profit before taxation 63 1 667 2 203 1 981 3 410 Taxation 160 (14) (560) (3) (107) Profit/(loss) for the year 223 1 653 1 643 1 978 3 303
REVIEW OF FINANCIAL PERFORMANCE The 2016 financial year was a challenging one for the global financial year. Kumba Iron Ore Limited did not declare any economy, South Africa and the IDC Group. Most subsidiaries and dividends during the period as a result of the extended associated companies are feeling the strain of the unfavourable depressed iron ore prices, compared to a dividend of economic environment. The Group made a consolidated profit R969 million declared in 2015. of R223 million compared to a profit of R1.7 billion in 2015. The negative impact this had on dividend income was partially REVENUE offset by a dividend in specie of R684 million received from BHP Billiton upon the demerger of South32 Limited. On Group Revenue for the year has decreased by 1% to R19.4 billion 19 August 2015, BHP Billiton announced a plan to unbundle its from R19.6 billion in 2015. non-core portfolio (aluminium, coal, manganese, nickel, silver Scaw’s performance has continued to deteriorate during the and lead assets) into South32, a global metals and mining current year. Full year revenue of R5.7 billion from Scaw is 10% company formed specifically for that purpose. Shareholders lower than the previous financial year (R6.3 billion) due to have retained their BHP Billiton shareholding and received an continuing difficult trading conditions within the steel sector in specie distribution of shares in South32 on a pro rata 1:1 basis, and slower growth in China (the largest consumer of steel), the for no consideration. increasing cost of electricity, and low spending by the mining sector due to falling commodity prices and subdued growth in Group revenue: to (R’million) the local economy. Management has initiated several interventions aimed at improving performance. Some of these are: • improving of efficiency through process reviews; • focusing on core business and selling non-core assets; • restructuring of the company balance sheet; • a proposed further reduction of the workforce, which the company is currently discussing with labour unions, and • a repositioning of the company as the main exporter to the African continent. Substantial cost savings are expected from these initiatives, with more benefits expected to flow from the Strategic Equity Partner implementation. Revenue from Foskor is up by 11% from the previous year to R5.9 billion, mainly due to the favourable impact on selling prices of the Rand/US Dollar exchange rate.
Interest income of R2.4 billion is 7% above that of the previous year due to an increase in loans and advances during the year Manufacturing, mining and other income Free income and a higher interest rate environment for the IDC Company. Interest received Dividends received Dividends received are 12% lower compared to the previous
2016 Integrated Report 65 2 PERFORMANCE AND IMPACT
IMPACT ON FINANCIAL SUSTAINABILITY (continued)
OPERATING PROFIT/(LOSS) INCOME FROM EQUITY-ACCOUNTED The operating loss for the year is R494 million (2015: R1 billion INVESTMENTS profit) mainly due to an increase in impairments and a decrease in With the Group’s share of profits standing at R557 million, our dividends as indicated on the previous page. equity-accounted investments have shown a slight decline in performance during the reporting period, compared to a Impairments for the Group significantly increased by R1.6 billion, profit of R656 million in 2015. The continued positive impact is from R1.5 billion to R3.2 billion, still reflecting the difficult encouraging, given the protracted pressure on commodity prices. trading conditions persisting in the South African economy. The main reasons for the increase in impairments in the current Income/(losses) from equity accounted investments: financial year were the adverse macro-economic environment to (R’million) and the protracted commodities prices slump. The impact of the weakening Rand, interest rate hikes and the drought also had a negative impact on some exposures. The Company has embarked on various initiatives to contain any further increases in impairments, and we are confident that these interventions will be effective in curbing the growth in impairments, and allow us to continue to play our counter-cyclical role in the economy. Financing costs have decreased by 6% to R1.3 billion due to exchange rate gains, as a result of the weakening of the Rand during the year. Operating expenses (excluding impairments) marginally increased by 3% from R4.4 billion to R4.5 billion. This is mainly due to cost-efficiency initiatives. We made a capital profit of R453 million from the disposal of certain listed and - unlisted investments during the year compared to R640 million - in the previous year. -
During 2015 we received R406 million from the South African - government to fund the Small Enterprise Finance Agency (sefa) - (2015: R284 million). The Export Credit Insurance Corporation of South Africa Limited (ECIC) operates an interest make-up scheme, through which compensation is made to participating lenders for interest rate Loan, advances and investments: to (R’million) risk, liquidity risk, basis risk and credit risk assumed in the funding of ECIC-insured export credit loans. This scheme is implemented by the South African government to promote the export of South African goods and services. We received R41 million from the scheme during the past financial year (2015: R39 million).
Operating profit/(loss): to (R’million)
Loans and advances Investment at cost Revaluation of investment to fair value
LOANS, ADVANCES AND INVESTMENTS - We have advanced R11.4 billion in new loans, advances and investments during the year, up from R10.9 billion in 2015. This resulted in loans and advances growing to R23.9 billion (net of repayments) from R22.4 billion and investments increasing from R28.2 billion to R33 billion (net of disposals and preference share redemptions).
66 Industrial Development Corporation of South Africa Limited The revaluation of investments to fair value decreased from The private placement bonds we issued to the Public Investment R44.9 billion to R38.6 billion, mainly due to the decrease in the Corporation (PIC) for green initiatives and the Unemployment value of listed equities following downward trends in the oil, Insurance Fund (UIF) for creating and sustaining permanent platinum, manganese, steel and iron ore prices. jobs, continue to be tapped. Cumulatively, R4 billion has been utilised under the PIC bond. Our debt funding activity during The largest declines in market values were as a result of our BHP the year included R7.8 billion sourced from public bonds, private Billiton, Kumba Iron Ore and Mozal investments, all affected by placements, commercial banks and DFIs, with repayments the commodities slump. We are committed to diversifying our of R3.2 billion. We continue to meet our financial obligations portfolio over the medium term in order to minimise the risk of emanating from these funding sources while maintaining concentration towards commodities, and to invest in a diverse excellent relationships with our lenders and investors. portfolio with more stable growth prospects. TOTAL ASSETS, CAPITAL AND RESERVES AND BORROWINGS DEBT/EQUITY Borrowings: to (R’million) Total assets declined from R122.3 billion in 2015 to R121.3 billion during the review period mainly as a result of the decrease in the fair value of BHP Billiton and Kumba Iron Ore Limited, largely due to lower iron ore prices. Our borrowings have grown in line with the growth in loans and advances. Higher debt levels and lower reserves increased the debt/equity ratio from 27% in 2015 to 33% in 2016.
Total assets, capital and reserves (R’million) and the debt/equity ratio: to
%
%
%
%
% The growth in our borrowings portfolio was aligned with our strategy to fund growth in the loans and advances book predominantly from borrowings. Borrowings for the year grew % to R28 billion from R24 billion in 2015.
During the past financial year, we continued with our public Total assets Capital and reserves Debt/equity bond issuances under the IDC Domestic Medium-Term Note (DMTN) programme. This resulted in additional issuances of R1.5 billion in May 2015 and R2 billion in November 2015. Investors responded positively to these issuances, with the IMPAIRMENTS (IDC COMPANY) bonds 2.3 times and 2.1 times over subscribed respectively. The impairments level has increased steadily over the past five years in value terms, from R6.8 billion in 2012 to R11.8 billion The demand and pricing of the bond issuances reflected in 2016. A 15% increase occurred in cumulative impairments investors’ confidence in the Corporation’s creditworthiness between the 2015 and 2016 financial years. As a ratio of the and financial standing. We will continue our bond issuance total outstanding financing book at cost, however, impairment programme as part of our funding sources diversification levels increased marginally from 16.7% in the previous year to strategy. This strategy will also be informed by the local and 16.9% during the period under review. Impairment levels for the international market conditions, pricing and available liquidity portfolio at market values increased from 8.8% to 10.1%. The in these financial markets. Traditional sources – both local and impairment level remains within the threshold of 20% as set by international commercial banks and Development Financial the Board. Institutions (DFIs) – will also be explored as part of our funding sources. The DFIs with which we have bilateral agreements are Kreditanstaltfür Wiederaufbau (KfW) Development Bank, African Development Bank (ADB), Agence Française de Développement (AfD)/Proparco, European Investment Bank (EIB), China Development Bank (CDB) and China Construction Bank (CCB).
2016 Integrated Report 67 2 PERFORMANCE AND IMPACT
IMPACT ON FINANCIAL SUSTAINABILITY (continued)
Portfolio value (R’million) and impairments Write-offs (R’million)
%
%
%
%
%
%
%
%
% Investments at cost Impairments as a % of cost Fair value adjustment Impairments as a % of market value
The increasing impairment levels, although aligned with our ASSET AND LIABILITY MANAGEMENT risk appetite and our role in supporting high-risk sectors and businesses, remain largely unattractive to commercial financiers. LIQUIDITY RISK The impairment charge to the income statement of R3.6 billion Liquidity risk refers to the inability of the Group to meet its for the year ended 31 March 2016 was 99% higher than the obligations promptly for all maturing liabilities, or the increase in charge reported at financial year end in 2015. financing assets, including commitments and any other financial obligations (funding liquidity risk), or to do so on materially Key factors that contributed to the rising impairments included disadvantageous terms (market liquidity risk). the decline in commodity prices and deterioration in trading conditions. Many of our clients experienced challenges in their Liquidity risk is governed by the Asset and Liability Management operating environments. Globally, the mining industry faced Policy. The Asset and Liability Committee (ALCO) provides the serious challenges due to steep slides in commodity prices and objective oversight and makes delegated decisions related to a longer-than-anticipated recovery period. liquidity risk exposures. Prospects of recovery in the local mining and metals sectors Sources of liquidity risk include: were hampered by protracted labour unrest and a challenging • Unpredicted accelerated drawdowns on approved financing regulatory environment. Our role as a development financier was or call-ups of guarantee obligations to stimulate business growth with new funding and restructuring • The inability to roll and/or access new funding and to minimise the impact of job losses on society. • The unforeseen inability to collect what is contractually due to the Group We compiled a comprehensive list of impairment initiatives to • Liquidity stress at subsidiaries and/or other SOEs mitigate the rising trend of impairments. This was approved by • A recall without due notice of on-balance sheet funds the Board’s Risk and Sustainability Committee and implemented managed by the Group on behalf of third-parties during the 2016 financial year. • A breach of covenant(s), resulting in the forced maturity of The Executive Management and Board Risk and Sustainability borrowing(s) Committees receive reports on impairments and credit risk • An inability to liquidate assets in a timely manner with measures quarterly. minimal risk of capital losses The Corporate Treasury manages liquidity on a day-to-day basis WRITE-OFFS (IDC COMPANY) within Board-approved treasury limits to ensure that: The IDC writes off investments only after, inter alia, viable • Sufficient, readily-available liquidity to meet probable turnaround and restructuring options have been fully exhausted operational cash flow requirements for a rolling three-month and the exposure is regarded as unrecoverable. period is available at all times, and • Excess liquidity is minimised to limit the consequential drag During the year under review, R2.1 billion was written off (2015: on profitability. R1.3 billion), an increase of 57% over the previous year. The Media (52%) and Textiles (16%) SBUs accounted for 68% Liquidity coverage ratios aim to ensure that suitable levels of of the write-offs, for reasons relating mainly to some business unencumbered high-quality liquid assets are held to protect partners' poor management and market penetration, as well as against unexpected, yet plausible, liquidity stress events. fraud and the mismanagement of funds. Two separate liquidity stresses are considered. Firstly, an acute three-month liquidity stress that impacts strongly on both Written-off exposures have a low probability of recovery, while funding and market liquidity, and secondly, a protracted in some instances we recoup already written-off amounts. The 12-month liquidity stress with a moderate effect on both trend in write-offs over the past five years is illustrated in the funding and market liquidity. Approved high-quality liquid assets following chart.
68 Industrial Development Corporation of South Africa Limited include cash, near-cash, committed facilities, as well as a portion EQUITY PRICE RISK of the Group’s listed equity investments after applying forced- Equity price risk is the risk that adverse movements in equity sale discounts. prices may cause a reduction in the value of the Group’s investments in listed and/or unlisted equity investments MARKET RISK and therefore includes future earnings and/or the value of Market risk is the risk that the value of a financial position or shareholders’ equity. portfolio will decline due to adverse movements in market rates. In respect of market risk, the Group is exposed to interest Sources of equity price risk include: rate risk, exchange rate risk and equity price risk. Market risk is • Systematic risk or volatility in relation to the market as a whole governed by the Asset and Liability Management Policy and • Unsystematic risk or company-specific risk factors ALCO provides the objective oversight and makes delegated The investment portfolio’s beta is used as an indication of decisions related to market risk exposures. systematic, non-diversifiable risk. Due to the long-term nature of our investments, unsystematic risk is managed through INTEREST RATE RISK diversification. Interest rate risk is the risk that changes in market interest rates may cause a reduction in our future net interest income and/or Sensitivity analyses were performed on our equity portfolio economic value of our shareholders’ equity. Our interest rate risk to determine the possible effect on the fair value should a is a function of our interest-bearing assets and liabilities. range of variables change, such as cash flow, earnings and net asset values. These assumptions were built into the applicable The primary sources of interest rate risk include: valuation models. • Repricing risk, as a result of interest-bearing assets and liabilities that reprice within different periods. This includes Our Asset and Liability Management and Risk Management the endowment effect due to an overall quantum difference practices, together with regular scenario planning, assist between interest-bearing assets and liabilities. management in ensuring that this objective is achieved. • Basis risk, as a result of the imperfect correlation between interest rate changes (spread volatility) on interest-bearing assets and FUTURE PERFORMANCE liabilities that reprice within the same period. We expect 2017 to be another challenging year as a result of • Yield curve risk, as a result of unanticipated yield curve shifts. modest growth locally and globally. • Optionality, as a result of embedded options in assets (ie prepayment) and liabilities (i.e. early settlement), which Profitability could be impacted significantly in the year ahead may be exercised based on interest rate considerations. due mainly to lower dividend income forecasts. Despite the decline in total assets, our balance sheet remains strong and The sensitivity to interest rate shocks and/or changes in we intend growing it further during the next five years, with interest-bearing balances is measured by means of earnings and advances of between R77 billion and R94 billion in total over economic value approaches. The former quantifies the impact that period. This will be funded from borrowings of between on net interest income over the next 12 months, while the latter R69 billion and R84 billion and disposal of investments, with the gauges the impact on the fair market value of assets, liabilities balance funded through internally generated funds. Gearing and equity. levels are expected to increase over the next few years, in line with the strategy to utilise more debt funding. EXCHANGE RATE RISK Exchange rate risk is the risk that adverse changes in exchange Value added statement (IDC Company) rates may cause a reduction in our future earnings and/or our Figures in Rand million 2016 2015 shareholders’ equity. Value created In the normal course of business, we are exposed to exchange Net interest income 1 779 1 411 rate risk through our trade finance book and exposure to Impairment losses on loans investments in the rest of Africa. The risk is divided into: advances and investments (3 644) (1 827) • Translation risk, which refers to the exchange rate risk associated with the consolidation of offshore assets and Other income from lending activities 786 1 055 liabilities, or the financial statements of foreign subsidiaries Other investment income 1 886 2 668 for financial reporting purposes. Operating expenditure and project • Transaction risk, which arises where we have cash flows/ feasibility expenses (91) (515) transactions (i.e. a monetary asset or liability, off-balance sheet 716 2 792 commitment or forecast exposure) denominated in foreign currencies whose values are subject to unanticipated changes Value allocated in exchange rates. Benefits to employees 937 931 Social spending in communities 87 150 Any open (unhedged) position in a particular currency gives rise to exchange rate risk. Open positions can be short (we To government as taxation and need to buy foreign currency to close the position) or long dividends (25) 96 (we need to sell foreign currency to close the position), with the Taxation (including deferred tax) (25) 46 net open foreign currency position referring to the sum of all Dividends to shareholders – 50 open positions (spot and forward) in a particular currency. For Value reinvested in operations (283) 1 615 purposes of hedging, net open foreign currency positions are Transfer (from)/to reserves segmented into the following components: (retained earnings) (307) 1 597 • All exposures related to foreign currency-denominated Depreciation and amortisation 24 18 lending and borrowing • All foreign currency-denominated payables in the form of 716 2 792 operating and capital expenditure, as well as foreign currency denominated receivables in the form of dividends and fees
2016 Integrated Report 69 3 STATUTORY AND ADDITIONAL INFORMATION
CONFIRMATION OF ACCURACY AND FAIR PRESENTATION
INTEGRATED REPORT FOR THE 2016 FINANCIAL YEAR END I hereby acknowledge that the Integrated Report of the Industrial Development Corporation of South Africa Limited (the IDC) has been submitted to the Auditor-General for auditing in terms section 55(1)(c) of the PFMA. I acknowledge my responsibility for the accuracy of the accounting records and the fair presentation of the financial statements and confirm, to the best of my knowledge, the following:
ANNUAL FINANCIAL STATEMENTS The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). All amounts and information in the Integrated Report are consistent with the financial statements submitted to the auditors for audit purposes.
PERFORMANCE INFORMATION The performance information fairly reflects the operations, and actual output against planned targets for performance indicators as per the Corporate Plan of the IDC for the financial year ended 31 March 2016. The performance information has been reported on in accordance with the requirements of the guidelines on annual reports as issued by National Treasury. A system of internal control has been designed to provide reasonable assurance as to the integrity and reliability of performance information.
HUMAN RESOURCE MANAGEMENT The human resource information contained in the respective tables in the integrated report, fairly reflects the information of the IDC for the financial year ended 31 March 2016.
IN RESPECT OF MATERIAL ISSUES The Integrated Report is complete, accurate and free from any omissions.
MG Qhena BA Mabuza Chief Executive Officer Chairperson of the Board 30 June 2016 30 June 2016
70 Industrial Development Corporation of South Africa Limited INDEPENDENT ASSURANCE PROVIDERS’ LIMITED ASSURANCE REPORT ON SELECTED PERFORMANCE INFORMATION
TO THE DIRECTORS OF INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTH AFRICA We have undertaken a limited assurance engagement on selected performance information, as described below, and presented in the 2016 Integrated Report of Industrial Development Corporation of South Africa Limited (IDC) for the year ended 31 March 2016 (the Report), as well as in the supplementary online information in Section 5: Corporate Governance and Procurement, available on the IDC website, at [email protected] (the supplementary online information). This engagement was conducted by a multidisciplinary team of sustainable development and assurance specialists with relevant experience in integrated and sustainability reporting..
SUBJECT MATTER We are required to provide limited assurance on the following selected performance information, marked with a ‘LA’ symbol on the relevant pages in the Report and the supplementary online information. The selected performance information described below has been prepared in accordance with the Global Reporting Initiative Sustainability Reporting (GRI G4) Guidelines supported by IDC’s specific guidelines and IDC’s own internal guidelines (the IDC reporting criteria).
Material Unit of Reference matter Key performance indicators measurement page number Boundary Value of funding provided – approved with signed agreement Rand-value 4, 29 to 30 of the report IDC only Impacting on Value of funding approved and disbursed under special schemes Rand-value Supplementary online IDC only industrial including drought relief and distressed funding information in Section 5 development Value of funding flow to communities, number of trusts, spatial Rand-value 42 of the report IDC only interventions and social enterprises funded and value spend Value and impact of funding in rural areas Rand-value and 40 of the report IDC only text claim
Contributing Gap analysis on environmental performance data, specifically relating Text claim 44 of the report Foskor and to socio- to Scope 1 and Scope 2 Greenhouse gas emissions at the material Scaw economic subsidiaries (Foskor and Scaw) to observe if the control environment is development sound to prevent any material misstatements on the reported data as well as approach adopted to managing and mitigating the impacts. This will therefore include understanding if there are strategies and risk management processes in place to elevate environmental issues. Turnaround time on non-complex transactions (from start of due Number 80 to 81 of the report IDC only diligence to delivery of agreement to client) Training spend (average training spent per employee) Rand value Supplementary online IDC only information in Section 5 LA1: Total number and rates of new employee hires and employee Number and Supplementary online IDC only turnover by age group, gender, and region percentage information in Section 5 Building LA9: Average hours of training per year per employee by gender, Number 51 of the report IDC only strong and employee category partnerships LA10: Programmes for skills management and lifelong learning that Text claim 50 of the report IDC only support the continued employability of employees and assist them in managing career endings LA12: Staff complement and profile: breakdown of employees per Number and 48 to 49 of the report IDC only employee category according to gender, age group, minority group percentage membership, and other indicators of diversity Supplementary online information in Section 5 SO3: Total number and percentage of operations assessed for risks Number and 59 of the report IDC only Committed related to corruption and the significant risks identified percentage to good governance SO4: Communication and training on anti-corruption policies and Number and 58 to 59 of the report IDC only procedures text claim
DIRECTORS’ RESPONSIBILITIES The directors are responsible for the selection, preparation and presentation of the selected performance information in accordance with the IDC reporting criteria. This responsibility includes the identification of stakeholders and stakeholder requirements, material issues, commitments with respect to IDC’s performance and for the design, implementation and maintenance of internal controls relevant to the preparation of the Report and supplementary online information that is free from material misstatement, whether due to fraud or error.
OUR INDEPENDENCE AND QUALITY CONTROL We have complied with the independence and all other ethical requirements of the Code of Professional Conduct for Registered Auditors issued by the Independent Regulatory Board for Auditors (IRBA) that is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. KPMG Services Proprietary Limited and SizweNtsalubaGobodo Incorporated apply the International Standard on Quality Control 1, and accordingly maintain comprehensive systems of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.
2016 Integrated Report 71 3 STATUTORY AND ADDITIONAL INFORMATION
INDEPENDENT ASSURANCE PROVIDERS’ LIMITED ASSURANCE REPORT ON SELECTED PERFORMANCE INFORMATION (continued)
OUR RESPONSIBILITY Our responsibility is to express a limited assurance conclusion on the selected performance information based on the procedures we have performed and the evidence we have obtained. We conducted our limited assurance engagement in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (revised), Assurance Engagements other than Audits or Reviews of Historical Financial Information, issued by the International Auditing and Assurance Standards Board. That standard requires that we plan and perform our engagement to obtain limited assurance about whether the selected performance information is free from material misstatement. A limited assurance engagement undertaken in accordance with ISAE 3000 (revised) involves assessing the suitability in the circumstances of IDC’s use of its reporting criteria as the basis of preparation for the selected performance information, assessing the risks of material misstatement of the selected performance information whether due to fraud or error, responding to the assessed risks as necessary in the circumstances, and evaluating the overall presentation of the selected performance information. A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both risk assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks. The procedures performed were based on our professional judgement and included inquiries, observation of processes performed, inspection of documents, analytical procedures, evaluating the appropriateness of quantification methods and reporting policies, and agreeing or reconciling with underlying records. Given the circumstances of the engagement, in performing the procedures listed above we: • Interviewed management and senior executives to obtain an understanding of the internal control environment, risk assessment process and information systems relevant to the performance reporting process; • Evaluated internal data management controls based on system walkthroughs; • Inspected selected internally and externally generated documents and records and comprehensive data analyses. • Recalculated certain performance information. • Evaluated whether the selected performance information presented in the Report and supplementary online information is consistent with our overall knowledge and experience of the performance of the IDC. The procedures performed in a limited assurance engagement vary in nature from, and are less in extent than for, a reasonable assurance engagement. As a result, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had we performed a reasonable assurance engagement. Accordingly, we do not express a reasonable assurance opinion about whether IDC’s selected performance information has been prepared, in all material respects, in accordance with the IDC reporting criteria.
LIMITED ASSURANCE CONCLUSION Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that the selected performance information set out in the subject matter paragraph for the year ended 31 March 2016 is not prepared, in all material respects, in accordance with the IDC reporting criteria.
OTHER MATTERS IDC intends to publish the Integrated Report for the 31 March 2016 financial year end, consisting of a printed report and additional online disclosures, both of which will be available on the IDC website, at [email protected]. The maintenance and integrity of IDC’s website is the responsibility of IDC management. Our procedures did not involve consideration of these matters and, accordingly, we accept no responsibility for any changes to either the information in the Report or supplementary online information, or our independent assurance report that may have occurred since the initial date of presentation on the IDC website.
RESTRICTION OF LIABILITY Our work has been undertaken to enable us to express limited assurance conclusions on the selected performance information to the directors of IDC in accordance with the terms of our engagement, and for no other purpose. We do not accept or assume liability to any party other than IDC, for our work, for this report, or for the conclusion we have reached.
KPMG Services Proprietary Limited SizweNtsalubaGobodo Inc. Per N Morris Registered Auditor Chartered Accountant (SA) Per D Manana Registered Auditor Chartered Accountant (SA) Director Registered Auditor 23 August 2016 Director 23 August 2016
KPMG Crescent SizweNtsalubaGobodo Building 85 Empire Road 20 Morris Street East Parktown Woodmead Johannesburg, 2193 Johannesburg, 2191
72 Industrial Development Corporation of South Africa Limited ACCOUNTING OFFICER’S STATEMENT OF RESPONSIBILITY FOR ANNUAL FINANCIAL STATEMENTS
STATEMENT OF RESPONSIBILITY FOR THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2016 The Accounting Authority is responsible for the preparation of the IDC’s Annual Financial Statements and for the judgements made in this information. The Accounting Authority is responsible for establishing, and implementing a system of internal control designed to provide reasonable assurance as to the integrity and reliability of the Annual Financial Statements. In my opinion, the financial statements fairly reflect the operations of the IDC for the financial year ended 31 March 2016. The external auditors are engaged to express an independent opinion on the Annual Financial Statements of the IDC. The IDC’s Annual Financial Statements for the year ended 31 March 2016 have been audited by the external auditors and their report is presented on pages 74 to 75. The Annual Financial Statements of the IDC set out on pages 83 to 150 have been approved.
MG Qhena Chief Executive Officer 30 June 2016
2016 Integrated Report 73 3 STATUTORY AND ADDITIONAL INFORMATION
INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT ON THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
REPORT ON THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS INTRODUCTION We have audited the consolidated and separate financial statements of the Industrial Development Corporation of South Africa Limited and its subsidiaries as set out on pages 84 to 150, which comprise the consolidated and separate statement of financial position as at 31 March 2016, the consolidated and separate statement of comprehensive income, statements of changes in equity and statement of cash flows for the year then ended, as well as the notes, comprising a summary of significant accounting policies and other explanatory information.
DIRECTORS’ RESPONSIBILITY FOR THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS The Board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of these consolidated and separate financial statements in accordance with the International Financial Reporting Standards and the requirements of the Public Finance Management Act of South Africa and for such internal control as the directors determines is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.
AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated and separate financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the consolidated and separate financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated and separate financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated and separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated and separate financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OPINION In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the financial position of the Industrial Development Corporation of South Africa Limited and its subsidiaries as at 31 March 2016 and its financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards and the requirements of the Public Finance Management Act.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS In accordance with the Public Audit Act of South Africa and the General Notice issued in terms thereof, we have a responsibility to report findings on the reported performance information against predetermined objectives of selected objectives presented in the annual performance report, compliance with legislation and internal control. The objective of our tests was to identify reportable findings as described under each subheading but not to gather evidence to express assurance on these matters. Accordingly, we do not express an opinion or conclusion on these matters.
PREDETERMINED OBJECTIVES We performed procedures to obtain evidence about the usefulness and reliability of the reported performance information of the following selected objectives presented in the Director’s report as set out on pages 79 to 81 of the annual report of the Industrial Development Corporation of South Africa Limited for the year ended 31 March 2016, and reported thereon to the directors/ Accounting Authority: • Development impact: Expected jobs created/saved on pages 80 to 81. • Development impact: Actual jobs created/saved on pages 80 to 81. • Development impact: Value of funding to black industrialists, women and youth on pages 80 to 81. • Development impact: Funding for transactions for localisation initiatives on pages 80 to 81. • Financial sustainability and efficiency: Level of impairments on pages 80 to 81. • Financial sustainability and efficiency: Cost to income ratio on pages 80 to 81. • Financial sustainability and efficiency: Growth in reserves on pages 80 to 81. • People: People turnover on pages 80 to 81. • Subsidiaries: SEFA balanced scorecard on pages 80 to 81. We evaluated the usefulness of the reported performance information to determine whether it was presented in accordance with the National Treasury’s annual reporting principles and whether the reported performance was consistent with the planned objectives. We further performed tests to determine whether indicators and targets were well defined, verifiable, specific, measurable, time bound and relevant, as required by the National Treasury’s Framework for managing programme performance information.
74 Industrial Development Corporation of South Africa Limited We assessed the reliability of the reported performance information to determine whether it was valid, accurate and complete. We did not identify any material findings on the usefulness and reliability of the reported performance information for the selected objectives.
ADDITIONAL MATTERS Although we identified no material findings on the usefulness and reliability of the reported performance information for the selected objectives, we draw attention to the following matter: Achievement of planned targets Refer to the information in the Director’s report on the performance information as set out on pages 79 to 81 of the annual report for information on the achievement of the planned targets for the year.
COMPLIANCE WITH LEGISLATION We performed procedures to obtain evidence that the Industrial Development Corporation of South Africa had complied with applicable legislation regarding financial matters, financial management and other related matters. We did not identify any instances of material non-compliance with specific matters in key legislation, as set out in the general notice issued in terms of the Public Audit Act.
INTERNAL CONTROL We considered internal control relevant to our audit of the financial statements and compliance with legislation, but not for the purpose of expressing an opinion on the effectiveness of internal control. We did not identify any significant deficiencies in internal control.
SizweNtsalubaGobodo Inc. Registered Auditor
KPMG Inc. Per D Manana Registered Auditor Chartered Accountant (SA) Registered Auditor Per S Malaba Director Chartered Accountant (SA) Registered Auditor 23 August 2016 Director SizweNtsalubaGobodo 23 August 2016 20 Morris Street East Woodmead KPMG Crescent Johannesburg, 2191 85 Empire Road Parktown Johannesburg, 2193
2016 Integrated Report 75 3 STATUTORY AND ADDITIONAL INFORMATION
REPORT OF THE BOARD AUDIT COMMITTEE
Report of the Board Audit Committee in terms of Regulations 27(1)(10)(b) and (c) of the Public Finance Management Act of 1999 (as amended) and requirements of King III Code of Governance BACKGROUND The IDC Board Audit Committee (BAC) assists the Board in fulfilling its oversight responsibilities, in particular with regard to evaluation of the adequacy and efficiency of accounting policies, internal controls and financial reporting processes. In addition, the BAC assesses the effectiveness of the Internal Auditors and the independence and effectiveness of the external auditors.
RESPONSIBILITIES, COMPOSITION AND FUNCTIONS OF THE COMMITTEE The committee’s roles and responsibilities include its statutory duties as per the Public Finance Management Act of 1999 (as amended), the requirements of King III Code of Governance, the Companies Act, No 71 of 2008 (as amended) and the responsibilities assigned to it by the Board. The committee therefore reports that it has adopted appropriate formal terms of reference as approved by the Board, and is satisfied that it has discharged its responsibilities as per the Companies Act, King III and PFMA. The committee has carried out its functions through the attendance at Audit Committee meetings and discussions with executive management, Internal Audit and external advisers where appropriate. The BAC consists of four members, all of whom are independent Non-executive directors, and its members are Ms NP Mnxasana (Chairperson), Mr RM Godsell, Dr SM Magwentshu-Rensburg and Mr B Molefe. The Audit Committee meets at least four times per annum, with authority to convene additional meetings as circumstances require. The invitees to committee meetings include the two Executive directors, Chief Risk Officer, internal and external auditors, the Head of Financial Management as well as the Head of Information Technology, and any other executives when necessary. To execute the key functions and discharge the responsibilities outlined in its charter the committee, during the period under review: • Assisted the Board of directors in its evaluation of the adequacy and efficiency of the internal control systems, accounting practices, information systems and auditing processes applied within the Company in the day-to-day management of its business • Facilitated and promoted communication between the Board, management, the external auditors and internal audit department on matters that are the responsibility of the committee • Introduced measures that, in the opinion of the committee, may enhance the credibility and objectivity of the financial statements and reports prepared with reference to the affairs of the Company (and the IDC Group) • Nominated and recommended for appointment as external auditors the Company registered auditors (KPMG Inc, and SNG. KPMG have subcontracted 20% of their portion of the audit to Ngubane & Co.), who, in the opinion of the committee, are independent of the IDC • Determined the fees to be paid to the external auditors and the auditors’ terms of engagement • Ensured that the appointment of the external auditors complied with the Companies Act and any other legislation relating to the appointment of auditors
INTERNAL CONTROL The BAC monitored the effectiveness of the IDC’s internal controls and compliance with the Enterprise wide Risk Management Framework (ERMF). The emphasis on risk governance is based on three lines of defence and the BAC uses the regular reports received from the three lines of defence (process owners/department heads; Risk & Compliance departments, Management; and Internal Audit department) to evaluate the effectiveness of the internal controls. The ERMF places weight on accountability, responsibility, independence, reporting, communication and transparency, both internally and with all the IDC’s key external stakeholders. No findings have come to the attention of the committee to indicate that any material breakdown in internal controls has occurred during the financial year under review. The committee is of the opinion that the internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the consolidated Annual Financial Statements, and accountability for assets and liabilities is maintained and that this is based on sound accounting policies, supported by reasonable and prudent judgements and estimates. The BAC is further of the opinion that the internal controls of the Corporation had been effective in all material aspects throughout the year under review. This opinion is based on the information and explanations given by management regarding various processes and initiatives aimed at improving the internal control environment and the integrity of information, discussions with Internal Audit, as well as the independent external auditors on the results of their audits. To formulate its opinion, the committee: • Monitored the identification and correction of weaknesses and breakdowns of systems and internal controls • Monitored the adequacy and reliability of management information and the efficiency of management information systems • Reviewed quarterly, interim and final financial results and statements and reporting for proper and complete disclosure of timely, reliable and consistent information • Evaluated on an ongoing basis the appropriateness, adequacy and efficiency of accounting policies and procedures, compliance with generally accepted accounting practice and overall accounting standards as well as any changes thereto • Discussed and resolved any significant or unusual accounting issues • Reviewed reports supplied by management regarding the effectiveness and efficiency of the credit monitoring process, exposures and related impairments and adequacy of impairment provisions to discharge its obligations satisfactorily • Reviewed and monitored all key financial performance indicators to ensure that they are appropriate and that decision-making capabilities are maintained at high levels • Reported to the Board on the effectiveness of the Company’s internal reporting controls
76 Industrial Development Corporation of South Africa Limited EXTERNAL AUDITORS The IDC’s external auditors are KPMG Inc, and SizweNtsalubaGobodo (SNG). KPMG has subcontracted 20% of their portion of the audit to assist with transformation objectives by offering an emerging black-owned audit firm, Ngubani & Co, an opportunity to be exposed to auditing a company the size of the IDC. The BAC has a well-established policy on auditors’ independence and audit effectiveness. The committee has satisfied itself that the external auditors, KPMG Inc, Ngubani & Co and SNG were independent of the Company, as set out in sections 90(2)(c) and 94(8) of the Companies Act, which includes consideration of compliance with criteria relating to independence or conflicts of interest as prescribed by the Independent Regulatory Board for Auditors. Requisite assurance was sought and provided by the external auditors that internal governance processes within their entities support and demonstrate their claim to independence. The committee, in consultation with executive management, agreed to the engagement letter, terms, audit plan and audit fees for the financial year ended 31 March 2016. The committee: • Approved the external auditor’s annual plan and related scope of work • Monitored the effectiveness of the external auditors in terms of their skills, independence, execution of the audit plan, reporting and overall performance • Considered whether the extent of reliance placed on internal audit by the external auditors was appropriate and whether there were any significant gaps between the Internal and External Audits • The BAC had also approved the Non-audit Services Policy that specifies that the external auditors are precluded from engaging in non-audit related services
FINANCIAL STATEMENTS The committee has reviewed the financial statements of the Company and the IDC Group and is satisfied that they comply in all material respects with IFRS and the requirements of the Companies Act and PFMA. During the period under review the committee: • Reviewed and discussed the audited Annual Financial Statements included in this Integrated Report with the external auditors, the Chief Executive and the Chief Financial Officer • Reviewed the external auditors’ report and management’s response thereto • Reviewed any significant adjustments resulting from external audit queries and accepted unadjusted audit differences • Reviewed areas of significant judgements and estimates in the Annual Financial Statements • Received and considered reports from the Internal Auditors
EXPERTISE AND EXPERIENCE OF FINANCE FUNCTION The committee has considered, and has satisfied itself of the overall appropriateness of the expertise and adequacy of resources of the IDC’s finance function and experience of the senior members of management responsible for the financial function.
DUTIES ASSIGNED BY THE BOARD INTEGRATED AND SUSTAINABILITY REPORTING The BAC fulfils an oversight role regarding the Company’s Integrated Report and the reporting process and considers the level of assurance coverage obtained from management, and internal and external assurance providers in making its recommendation to the Board. The committee considered the Company’s information as disclosed in the Integrated Report and has assessed its consistency with operational and other information known to committee members, and for consistency with the Annual Financial Statements. The committee discussed the information with management and has considered the conclusions of the external assurance provider. The committee is satisfied that the sustainability information is, in all material respects, reliable and consistent with the financial results. Nothing has come to the attention of the committee to indicate any material deficiencies in this regard.
COMBINED ASSURANCE The committee is responsible for monitoring the combined assurance model detailing significant processes, line management monitoring, Internal Audit and external assurances. This model is used to assess the appropriateness of assurance over risks/controls provided to the Board. Engagement regarding the extent to which the various assurance providers rely on each other’s work or where overlaps are unavoidable, take place continuously. A better coordination between External and Internal Audit has been achieved, however an area of improvement is considered for the next reporting year with other assurance providers such as Compliance Function and Risk Management Department.
GOING CONCERN The committee concurs that the adoption of the going concern assumption in the preparation of the consolidated Annual Financial Statements is appropriate and sound. This is after the committee reviewed a documented assessment by management of the going concern premise of the Company and the IDC Group.
2016 Integrated Report 77 3 STATUTORY AND ADDITIONAL INFORMATION
REPORT OF THE BOARD AUDIT COMMITTEE (continued)
GOVERNANCE OF RISK The Board has assigned oversight of the company’s risk management function to a separate Board Risk Committee. The chairman of the BAC attends the Board Risk Committee meetings as an ex officio member to ensure that information relevant to these committees is shared regularly. The committee fulfils an oversight role regarding financial reporting risks, internal financial controls, fraud risk and information technology risks as they relate to financial reporting. The committee is satisfied that the appropriate and effective risk management processes are in place. INTERNAL AUDIT IA forms part of the third line of defence as set out in the ERMF and engages with the first and second lines of defence to facilitate the escalation of key control breakdowns. More information about IA is provided in the online section of this report. The IA department has a functional reporting line to the committee chairperson and an operational reporting line to the CEO. The BAC, with respect to its evaluation of the adequacy and effectiveness of internal controls, receives reports from IA on quarterly basis, assesses the effectiveness of IA function, and reviews and approves the IA audit plan. The Audit Committee is responsible for ensuring that the company’s IA function is independent and has the necessary resources, standing and authority within the company to enable it to discharge its duties. The IA function’s annual audit plan was approved by the Audit Committee. The committee monitored and challenged, where appropriate, action taken by management with regard to adverse IA findings. The committee has overseen a process by which IA has performed audits according to a risk-based audit plan where the effectiveness of the risk management and internal controls were evaluated. These evaluations were the main input considered by the Board in reporting on the effectiveness of internal controls. The committee is satisfied with the independence and effectiveness of the IA function.
CONCLUSION Having considered, analysed, reviewed and debated information provided by management, IA and External Audit, the committee confirmed that: • The internal controls of the Group were effective in all material aspects throughout the year under review • These controls ensured that the group’s assets had been safeguarded • Proper accounting records had been maintained • Resources had been utilised efficiently • The skills, independence, audit plan, reporting and overall performance of the external auditors were acceptable Following our review of the financial statements for the year ended 31 March 2016, we are of the opinion that they comply with the relevant provisions of the PFMA, as amended, and IFRS, and that they fairly present the results of the operations, cash flow and financial position of the Corporation. The Board Audit Committee has complied with all the King III principles, with the inclusion of integrated reporting, evidenced by the Corporation’s fifth issue of its Integrated Report 2016. The committee is satisfied that it has complied in all material respects, with its legal, regulatory and other responsibilities. We hereby recommend the Integrated Report to the Board for approval. On behalf of the Board Audit Committee
Ms NP Mnxasana Chairperson of the Board Audit Committee 21 June 2016
GROUP COMPANY SECRETARY’S CERTIFICATE
DECLARATION BY THE GROUP COMPANY SECRETARY In terms of section 88(2)(e) of the Companies Act (2008) of South Africa, I certify that, to the best of my knowledge and belief, the IDC has lodged with the Registrar of Companies for the financial year ended 31 March 2016 all such returns as are required in terms of the Companies Act, No 71 of 2008, and that such returns are true, correct and up to date. In terms of section 19 of the IDC Act, No 22 of 1940, as amended, I certify that for the financial year ended 31 March 2016, the IDC has lodged with the Minister of Economic Development the financial statements in respect of the preceding financial year.
P Makwane Group Company Secretary 30 June 2016
78 Industrial Development Corporation of South Africa Limited DIRECTORS’ REPORT
INTRODUCTION The Industrial Development Corporation of South Africa Limited (IDC) was established in 1940 by an Act of Parliament. It is a registered public corporation and a Schedule 2 listed entity in terms of the Public Finance Management Act (PFMA), No 1 of 1999, and the related Treasury regulations. This report is presented in accordance with the provisions of the prescribed legislation and addresses the performance of the IDC, as well as relevant statutory information requirements. The Board of directors is the Accounting Authority as prescribed in the PFMA.
NATURE OF BUSINESS The IDC is a State-owned development finance institution that provides financing to entrepreneurs engaged in competitive industries, follows normal Company policies and procedures in its operations, pays income tax at corporate rates, and pays dividends to its shareholder. The IDC’s vision is to be the primary driving force of commercially sustainable industrial development and innovation for the benefit of South Africa and the rest of Africa. Its objective is to lead industrial capacity development. As part of its industry development activities, the IDC has equity interests in several companies operating in other industries throughout the economy. Although we aim to keep our shareholding in these companies to levels below 50%, we do in some instances gain control of these businesses for various reasons. Details of trading subsidiaries and joint ventures are set out in the notes to the financial statement on pages 124 to 129.
PERFORMANCE MANAGEMENT The IDC’s performance indicators reflect the Corporation’s goals as set out earlier in this Integrated Report. Measures related to our key objective of industrial capacity development are integrated with other indicators that measure our development impact, financial sustainability and efficiency, stakeholder relations, as well as the performance of important subsidiaries. Our primary performance evaluation focus is on our financing activities and dedicated, wholly owned financing subsidiaries. The performance measurement system ensures that the IDC remains aligned with its mandated objectives. We review performance indicators annually to account for changes in our external and internal environments and ensure that long-term objectives will be achieved. Performance against indicators is measured and reported on regularly to the IDC’s Executives and Board. Regular activity reports and management accounts ensure that target deviations can be detected and corrected, if necessary. The achievement of targets represents the expected level of performance. Performance targets are set at corporate, team and individual levels and performance-linked remuneration is based on the achievement of such targets.
PERFORMANCE INDICATORS The IDC adopted a balanced approach to performance measuring and adapted the principles of the balanced scorecard to support its own objectives and operations. We measure indicators in the following five areas: • Development impact • Financial sustainability and efficiency • People • Stakeholders • Subsidiaries
PERFORMANCE AGAINST PREDETERMINED OBJECTIVES External auditors review the performance measurement process and outcomes to ensure that targets are achieved accordingly and that the overall performance is a fair reflection of the Corporation’s activities during the period under review. Overall, the Corporation has recorded satisfactory performance, especially on short-term targets, in spite of prevailing economic conditions. In terms of funding activity, the overall level of funding approvals, at R14.5 billion for the year, were at the highest levels ever. The value of funding disbursements increased to R11.4 billion, the second highest level ever, but not enough to reach the base of R12.5 billion. Despite high levels of funding approved, the IDC could not leverage funding to the same extent as it has in previous years, with fewer large new projects approved and, in some cases, the IDC being the only funder injecting funds to alleviate the situation of companies in distress. IDC funding approvals, for which agreements were signed, are expected to create and save about 18 010 jobs, above the base expectations of 14 062. Information gathered from clients indicates that in excess of 15 000 actual jobs were created. Excellent achievement was recorded with targets for funding to black industrialists, and women and youth-empowered companies and localisation was exceeded. Overall, government departments’ impression of the IDC’s inputs into policy development was extremely favourable as indicated by survey ratings, with positive feedback received in a wide range of areas including inputs into policies related to black industrialists, collaboration on IPAP, steel pricing and other areas. The IDC’s contained costs and income figures were higher than budgeted, resulting in good performance on the indicator measuring the cost-to-income ratio. Impairments, as a percentage of the portfolio at cost, were better than the base expectations, but this came as a result of write-offs and remains an area of concern. Economic conditions and continued pressure on commodity prices continued to put pressure on the value of the IDC’s reserves. Staff turnover on the management band was high, but for other professional staff, it was much better than expected.
2016 Integrated Report 79 3 STATUTORY AND ADDITIONAL INFORMATION
DIRECTORS’ REPORT (continued)
The average turnaround time on non-complex transactions was better than expected but the feedback from clients indicates that there is scope for further improvement. sefa’s performance was slightly above expectations. Scaw’s turnaround strategy is performing in line with expectations while Foskor’s financial performance is a cause for concern, with plans being implemented to address this.
Perspec tive Theme Metric Description Base Target Actual Achievement Funding activity Value of funding disbursed Total value of funding disbursed by the IDC R12.5 billion R16.7 billion R11.4 billion Not achieved Funding leveraged Rand amount of outside total funding attracted 2:1 3:1 1.5:1 Not achieved for each rand of IDC funding Jobs Expected jobs created/saved Expected direct jobs created/saved at signature 14 062 22 000 18 010 Achieved base of agreement Actual jobs created/saved Actual jobs created/saved by IDC clients 14 081 16 193 15 775* Achieved base Industry development Facilitation of enabling IDC contribution to government policy formulation Qualitative rating by senior officials Rating of 3.7 on a scale of Achieved environment aimed at industrial development 1 to 5 Implementation of projects Implementation of strategic projects 70% of projects implemented 100% of projects implemented 79.5% of projects implemented Achieved base Black industrialists, Value of funding to black Value of funding approvals with an agreement R2 000 million R3 000 million R4 491 million Achieved target women and youth industrialists, women and signed for transactions benefiting black Development impact youth industrialists Value of funding approvals with an agreement R600 million R3 006 million Achieved signed for businesses owned by at least 25% women Value of funding approvals with an agreement R600 million R892 million Achieved signed for businesses owned by at least 25% youth Localisation Funding for transactions for Value of funding approvals with an agreement R1 500 million R3 500 million R4 725 million Achieved target localisation initiatives signed for transactions aimed at inputs into infrastructure or other government procurement Development Sustainability of business Percentage of overall number and value of capital 19.0% of value 17.5% of value 18.8% of value Achieved base sustainability partners more than 60 days in arrears 31.0% of number 29.5% of number 29.1% of number Achieved target Impairments Level of impairments Impairments as a percentage of the portfolio 17% 15.5% 16.9% Achieved base at cost Value of impairments as per balance sheet R12.5 billion R11.8 billion Not achieved Financial Management of costs Cost-to-income ratio Administration costs, excluding impairments 71.4% 51.4% 45.0% Achieved target sustainability and and project costs as a percentage of net interest, efficiency dividend and fee income (excluding dividend income from mature listed investments) Strength of balance Growth in reserves Five-year compound annual growth rate in the CPI (5.7%) CPI+4% (9.7%) CPI-8.0% (-2.3%) Not achieved sheet IDC’s reserves Human capital Staff turnover Annual voluntary turnover percentage 5.0% (M-band) 3.5% 6.7% Not achieved development of individuals in the Management and 10.0% (P-band) 8.0% 7.2% Achieved target People Professional bands Human capital Employer of choice CRF Institute Top Employer rating 73% 80% 75% Achieved base development
LA Turnaround times Turnaround time on Turnaround time on non-complex transactions: 17 15 14.7 Achieved target transactions (working days from date of start of due diligence Stakeholders to date of agreement being sent to client) Stakeholder Stakeholder perception Reputation Institute stakeholder perception survey 69% 76% 75% Achieved base interaction sefa performance rating as per its performance Rating of 3.1 on a sefa performance sefa balanced scorecard sefa’s performance rating Achieved against targets set in its balanced scorecard scale of 1 to 5 Non-binding offers received Scaw Scaw turnaround plan Attract partners to invest in Scaw At least sign an MoU with partners for Scaw Metals Achieved Subsidiaries from potential partners Profit/(loss) after interest and Rating based on financial performance relative Foskor tax as per audited financial Achieve budgeted financial results Losses larger than budgeted Not achieved to approved budgets statements
* Refers to the number of jobs as when agreements are signed whereas the number quoted elsewhere in the document refers to jobs as when a transaction gets approved
80 Industrial Development Corporation of South Africa Limited Perspec tive Theme Metric Description Base Target Actual Achievement Funding activity Value of funding disbursed Total value of funding disbursed by the IDC R12.5 billion R16.7 billion R11.4 billion Not achieved Funding leveraged Rand amount of outside total funding attracted 2:1 3:1 1.5:1 Not achieved for each rand of IDC funding Jobs Expected jobs created/saved Expected direct jobs created/saved at signature 14 062 22 000 18 010 Achieved base of agreement Actual jobs created/saved Actual jobs created/saved by IDC clients 14 081 16 193 15 775* Achieved base Industry development Facilitation of enabling IDC contribution to government policy formulation Qualitative rating by senior officials Rating of 3.7 on a scale of Achieved environment aimed at industrial development 1 to 5 Implementation of projects Implementation of strategic projects 70% of projects implemented 100% of projects implemented 79.5% of projects implemented Achieved base Black industrialists, Value of funding to black Value of funding approvals with an agreement R2 000 million R3 000 million R4 491 million Achieved target women and youth industrialists, women and signed for transactions benefiting black Development impact youth industrialists Value of funding approvals with an agreement R600 million R3 006 million Achieved signed for businesses owned by at least 25% women Value of funding approvals with an agreement R600 million R892 million Achieved signed for businesses owned by at least 25% youth Localisation Funding for transactions for Value of funding approvals with an agreement R1 500 million R3 500 million R4 725 million Achieved target localisation initiatives signed for transactions aimed at inputs into infrastructure or other government procurement Development Sustainability of business Percentage of overall number and value of capital 19.0% of value 17.5% of value 18.8% of value Achieved base sustainability partners more than 60 days in arrears 31.0% of number 29.5% of number 29.1% of number Achieved target Impairments Level of impairments Impairments as a percentage of the portfolio 17% 15.5% 16.9% Achieved base at cost Value of impairments as per balance sheet R12.5 billion R11.8 billion Not achieved Financial Management of costs Cost-to-income ratio Administration costs, excluding impairments 71.4% 51.4% 45.0% Achieved target sustainability and and project costs as a percentage of net interest, efficiency dividend and fee income (excluding dividend income from mature listed investments) Strength of balance Growth in reserves Five-year compound annual growth rate in the CPI (5.7%) CPI+4% (9.7%) CPI-8.0% (-2.3%) Not achieved sheet IDC’s reserves Human capital Staff turnover Annual voluntary turnover percentage 5.0% (M-band) 3.5% 6.7% Not achieved development of individuals in the Management and 10.0% (P-band) 8.0% 7.2% Achieved target People Professional bands Human capital Employer of choice CRF Institute Top Employer rating 73% 80% 75% Achieved base development
Turnaround times Turnaround time on Turnaround time on non-complex transactions: 17 15 LA 14.7 Achieved target transactions (working days from date of start of due diligence Stakeholders to date of agreement being sent to client) Stakeholder Stakeholder perception Reputation Institute stakeholder perception survey 69% 76% 75% Achieved base interaction sefa performance rating as per its performance Rating of 3.1 on a sefa performance sefa balanced scorecard sefa’s performance rating Achieved against targets set in its balanced scorecard scale of 1 to 5 Non-binding offers received Scaw Scaw turnaround plan Attract partners to invest in Scaw At least sign an MoU with partners for Scaw Metals Achieved Subsidiaries from potential partners Profit/(loss) after interest and Rating based on financial performance relative Foskor tax as per audited financial Achieve budgeted financial results Losses larger than budgeted Not achieved to approved budgets statements
* Refers to the number of jobs as when agreements are signed whereas the number quoted elsewhere in the document refers to jobs as when a transaction gets approved
2016 Integrated Report 81 3 STATUTORY AND ADDITIONAL INFORMATION
DIRECTORS’ REPORT (continued)
FUNDING The IDC sources loan funding mainly from international development agencies, commercial facilities through our relationships with commercial banks, and bond issuances. The general 2015 funding requirements for the IDC Mini Group to, inter alia, finance advances of R11.4 billion and borrowing redemptions of R5.0 billion, amounted to R18.8 billion (2015: R14.5 billion). These requirements were met mainly out of R6.2 billion of internally generated funds, namely repayments received and profits. New borrowings amounted to R10.5 billion for the year.
CORPORATE GOVERNANCE The IDC’s directors endorse the King III Report on Corporate Governance and, during the review period, endeavoured to adhere to those recommendations or explain non-adherence. Our performance in this regard is outlined in the Corporate Governance section of this annual report.
PUBLIC FINANCE MANAGEMENT ACT The IDC Board is responsible for the development of the Corporation’s strategic direction. Our Board-approved strategy and business plan are captured in the Shareholder’s Compact and Corporate Plan. Following agreement for the strategy and business plan with the Economic Development Department, the documents form the basis for detailed action plans and continuous performance evaluation. Our business units and departments are guided by the Shareholder’s Compact and Corporate Plan to prepare annual business plans, budgets and capital programmes to meet their strategic objectives. Day-to-day management responsibility is vested in line management through a clearly defined organisational structure and formal, delegated authority. We have a comprehensive system of internal controls designed to ensure that we meet corporate objectives and the requirements of the PFMA. Processes are in place to ensure that where controls fail, the failure is detected and corrected.
DIVIDENDS A dividend of R50 million was paid during the financial year.
VALUATION OF SHARES The value of the Group’s investment in listed shares decreased to R40.0 billion at the end of the 2016 financial year (2014: R45.0 billion).
REVIEW OF POST-BALANCE SHEET EVENTS The post-year-end value of the Group’s listed shares decreased by R320 million as a result of movements in the listed equities market.
SHARE CAPITAL The authorised (R1.5 billion) and issued share capital (R1.4 billion) remained unchanged during the reporting year.
AUDIT COMMITTEE INFORMATION The names of the Audit Committee members are reflected on page 56.
GOING CONCERN The directors assessed the IDC as being a going concern in terms of financial, operational and other indicators. The directors are of the view that our status as a going concern is assured.
DIRECTORS AND SECRETARY The current directors of the IDC, with brief biographies, are reflected on pages 12 to 15. The name and registered office of the Secretary appears on the inside back cover.
82 Industrial Development Corporation of South Africa Limited ANNUAL FINANCIAL 4 STATEMENTS 84 Statement of financial position 89 Geographical segments 85 Statement of comprehensive income 90 Reportable segments 86 Statement of changes in equity 92 Notes to the Annual Financial Statements 88 Statement of cash flows
IDC headquarters in Sandton, Johannesburg.
2016 Integrated Report 83 4 ANNUAL FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION
Group Company Figures in Rand million Note(s) 2016 2015 2016 2015 Assets Cash and cash equivalents 5 6 865 8 257 6 183 7 714 Derivative financial instruments 19 69 4 62 – Trade and other receivables 6 3 305 3 702 914 1 069 Inventories 7 3 599 3 853 4 4 Current tax receivable 207 264 200 260 Loans and advances 8 23 928 22 412 23 451 21 760 Investments 9 53 272 57 351 29 122 35 159 Non-current assets held-for-sale 10 118 65 – – Investments in subsidiaries 11 – – 46 887 43 415 Investments in associates, joint ventures and partnerships 12 18 314 15 763 15 421 15 624 Deferred tax 13 215 61 – – Investment property 14 362 299 15 15 Property, plant and equipment 15 10 816 9 921 166 129 Biological assets 16 215 247 – – Intangible assets 17 63 90 – – Total assets 121 348 122 289 122 425 125 149
Equity and liabilities Equity Equity attributable to equity holders of the Group/Company Share capital 18 1 393 1 393 1 393 1 393 Reserves 43 605 49 217 53 127 60 114 Retained income 39 717 39 187 23 480 23 353 84 715 89 797 78 000 84 860 Non-controlling interest 102 125 – – Total equity 84 817 89 922 78 000 84 860
Liabilities Bank overdraft 5 38 44 – – Derivative financial instruments 19 59 56 44 50 Trade and other payables 20 3 727 3 748 945 1 262 Current tax payable 2 3 – – Retirement benefit obligation 21 589 707 158 182 Other financial liabilities 22 27 984 24 005 38 987 33 566 Deferred tax 13 3 338 3 369 4 178 5 119 Provisions 23 768 417 23 48 Share-based payment liability 24 26 18 90 62 Total liabilities 36 531 32 367 44 425 40 289 Total equity and liabilities 121 348 122 289 122 425 125 149
84 Industrial Development Corporation of South Africa Limited STATEMENT OF COMPREHENSIVE INCOME
Group Company Figures in Rand million Note(s) 2016 2015 2016 2015 Revenue 25, 26 19 408 19 599 5 438 5 476 Cost of sales (11 918) (12 541) – – Gross profit 7 490 7 058 5 438 5 476 Finance costs paid 27 (1 317) (1 402) (1 300) (1 170) Gross profit after financing costs 6 173 5 656 4 138 4 306 Other income 581 663 406 398 Net capital gains 29 453 640 410 427 Operating expenses (7 701) (5 948) (4 802) (3 413) Operating (loss)/profit 30 (494) 1 011 152 1 718 Profits from equity-accounted investments 557 656 – 3 Profit before taxation 63 1 667 152 1 721 Taxation 32 160 (14) 25 (54) Profit for the year 223 1 653 177 1 667 Other comprehensive income: Items that will not be reclassified to profit or loss: Profits on property, plant and equipment revaluation 73 780 17 17 Remeasurements on net defined benefit liability/asset 59 (17) 40 (10) Income tax relating to items that will not be reclassified (26) (173) (13) 7 Total items that will not be reclassified to profit or loss 106 590 44 14
Items that may be reclassified to profit or loss: Exchange differences on translating foreign operations 129 (3) – – Available-for-sale financial assets adjustments (6 087) (21 789) (7 631) (18 700) Other reserves – (156) – – Share of comprehensive income of associates and joint ventures 530 696 (15) (23) Income tax relating to items that may be reclassified (290) 1 918 615 2 083 Total items that may be reclassified to profit or loss (5 718) (19 334) (7 031) (16 640) Other comprehensive income for the year net of taxation 34 (5 612) (18 744) (6 987) (16 626) Total comprehensive loss for the year (5 389) (17 091) (6 810) (14 959)
Profit for the year attributable to: Owners of the parent 580 1 956 177 1 667 Non-controlling interest (357) (303) – – 223 1 653 177 1 667 Total comprehensive income for the year attributable to: Owners of the parent (5 032) (16 922) (6 810) (14 959) Non-controlling interest (357) (169) – – (5 389) (17 091) (6 810) (14 959)
2016 Integrated Report 85 4 ANNUAL FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN EQUITY
Foreign Total attributable currency to equity holders Total translation Associated Revaluation Common Share-based Retained of the Group/ Non-controlling Figures in Rand million share capital reserve entities reserve reserve control reserve Other reserve payment reserve income Company interest Total equity Group Balance at 31 March 2014 1 393 894 806 64 206 1 657 94 304 37 415 106 769 215 106 984 Total comprehensive income for the year – 485 208 (19 295) – (142) – 1 822 (16 922) (169) (17 091) Transactions with non-controlling shareholders – – – – – – – – – 79 79 Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – 485 208 (19 295) – (142) – 1 772 (16 972) (90) (17 062) Balance at 31 March 2015 1 393 1 379 1 014 44 911 1 657 (48) 304 39 187 89 797 125 89 922 Total comprehensive income for the year – 760 (101) (6 317) – 46 – 580 (5 032) (357) (5 389) Transactions with non-controlling shareholders – – – – – – – – – 334 334 Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – 760 (101) (6 317) – 46 – 530 (5 082) (23) (5 105) Balance at 31 March 2016 1 393 2 139 913 38 594 1 657 (2) 304 39 717 84 715 102 84 817
Company Balance at 31 March 2014 1 393 – (3) 75 520 1 222 1 – 21 736 99 869 – 99 869 Total comprehensive income for the year – – (23) (16 593) – (10) – 1 667 (14 959) – (14 959) Contributions introduced – – – – – – – – – – – Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – – (23) (16 593) – (10) – 1 617 (15 009) – (15 009) Balance at 31 March 2015 1 393 – (26) 58 927 1 222 (9) – 23 353 84 860 – 84 860 Total comprehensive income for the year – – (15) (7 003) – 31 – 177 (6 810) – (6 810) Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – – (15) (7 003) – 31 – 127 (6 860) – (6 860) Balance at 31 March 2016 1 393 – (41) 51 924 1 222 22 – 23 480 78 000 – 78 000 Note(s) 18 34 34 34 34 34
86 Industrial Development Corporation of South Africa Limited Foreign Total attributable currency to equity holders Total translation Associated Revaluation Common Share-based Retained of the Group/ Non-controlling Figures in Rand million share capital reserve entities reserve reserve control reserve Other reserve payment reserve income Company interest Total equity Group Balance at 31 March 2014 1 393 894 806 64 206 1 657 94 304 37 415 106 769 215 106 984 Total comprehensive income for the year – 485 208 (19 295) – (142) – 1 822 (16 922) (169) (17 091) Transactions with non-controlling shareholders – – – – – – – – – 79 79 Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – 485 208 (19 295) – (142) – 1 772 (16 972) (90) (17 062) Balance at 31 March 2015 1 393 1 379 1 014 44 911 1 657 (48) 304 39 187 89 797 125 89 922 Total comprehensive income for the year – 760 (101) (6 317) – 46 – 580 (5 032) (357) (5 389) Transactions with non-controlling shareholders – – – – – – – – – 334 334 Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – 760 (101) (6 317) – 46 – 530 (5 082) (23) (5 105) Balance at 31 March 2016 1 393 2 139 913 38 594 1 657 (2) 304 39 717 84 715 102 84 817
Company Balance at 31 March 2014 1 393 – (3) 75 520 1 222 1 – 21 736 99 869 – 99 869 Total comprehensive income for the year – – (23) (16 593) – (10) – 1 667 (14 959) – (14 959) Contributions introduced – – – – – – – – – – – Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – – (23) (16 593) – (10) – 1 617 (15 009) – (15 009) Balance at 31 March 2015 1 393 – (26) 58 927 1 222 (9) – 23 353 84 860 – 84 860 Total comprehensive income for the year – – (15) (7 003) – 31 – 177 (6 810) – (6 810) Distributions to owners of the Company Dividends – – – – – – – (50) (50) – (50) Total changes – – (15) (7 003) – 31 – 127 (6 860) – (6 860) Balance at 31 March 2016 1 393 – (41) 51 924 1 222 22 – 23 480 78 000 – 78 000 Note(s) 18 34 34 34 34 34
2016 Integrated Report 87 4 ANNUAL FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
Group Company Figures in Rand million Note(s) 2016 2015 2016 2015 Cash flows from operating activities Cash used in operations 37 (515) (972) (1 237) (450) Interest received 2 346 2 206 3 128 2 581 Dividends received 2 723 3 104 1 886 2 238 Finance costs paid (1 387) (1 310) (1 411) (1 104) Tax paid 39 (100) (406) (241) (407) Changes in operating funds 994 763 2 512 2 955 Increase on operating assets (2 985) (1 892) (2 909) (1 594) Increase in operating liabilities 3 979 2 655 5 421 4 549 Net cash generated from operating activities 4 061 3 385 4 637 5 813
Cash flows from investing activities Purchase of property, plant and equipment 15 (2 513) (1 180) (46) (14) Proceeds on sale of property, plant and equipment 15 300 371 – 4 Purchase of investment property 14 – (3) – – Purchase of other intangible assets 17 (2) (58) – – Business combinations 38 14 – – – Acquisition of investments (3 771) (3 008) (6 622) (6 008) Purchase of biological assets 16 (33) (27) – – Proceeds on sale of biological assets 16 15 9 – – Proceeds on realisation of investments 593 1 003 550 719 Net cash used in investing activities (5 397) (2 893) (6 118) (5 299)
Cash flows from/(used in) financing activities Dividends paid (50) (50) (50) (50) Net cash used in financing activities (50) (50) (50) (50)
Net (decrease)/increase in cash and cash equivalents (1 386) 442 (1 531) 464 Cash at the beginning of the year 8 213 7 771 7 714 7 250 Total cash at the end of the year 5 6 827 8 213 6 183 7 714
88 Industrial Development Corporation of South Africa Limited GEOGRAPHICAL SEGMENTS
South Africa Rest of Africa Other Total Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 Income Interest received 1 998 1 826 347 377 1 3 2 346 2 206 Dividends received 2 698 3 061 25 24 – 19 2 723 3 104 Fee income 467 707 – – – – 467 707 Farming, manufacturing and mining income 12 597 13 276 184 33 1 091 273 13 872 13 582 Revenue 17 760 18 870 556 434 1 092 295 19 408 19 599 Share of profits of equity- accounted investments 1 032 910 24 179 – – 1 056 1 089 Other income 581 660 – – – 3 581 663 Net capital gains 453 640 – – – – 453 640 Expenses Financing expenses (1 317) (1 402) – – – – (1 317) (1 402) Operating expenses (15 696) (15 984) (26) (29) (102) (274) (15 824) (16 287) Share of losses of equity- accounted investments (291) (431) (167) (2) (41) – (499) (433) Taxation 163 (19) – – (3) 5 160 (14) Depreciation (723) (598) – – – – (723) (598) Impairment of property, plant and equipment (200) – – – – – (200) – Net movement in impairments (3 161) (1 526) – – – – (3 161) (1 526) Project feasibility expenses 289 (78) – – – – 289 (78) Profit for the year (1 110) 1 042 387 582 946 29 223 1 653 Total assets 110 093 112 644 10 115 8 556 1 140 1 089 121 348 122 289 Interest in equity-accounted investments 13 888 11 996 4 426 3 767 – – 18 314 15 763 Total liabilities 36 413 32 280 4 6 112 81 36 529 32 367 Capital expenditure 2 522 1 180 – – – – 2 522 1 180 Capital expenditure commitments 87 263 – – – – 87 263
Other includes all countries outside the African continent. Management has determined the operating segments based on the reports reviewed by the Executive Committee that are used to make strategic decisions. The Executive Committee considers the business primarily from a product perspective. The products are segmented into financing activities and non-financing activities. Segment assets consist primarily of loans, advances, investments, property, plant and equipment, and cash and cash equivalents. Segment liabilities comprise non-current and current liabilities. Capital expenditure comprises additions to property, plant and equipment.
2016 Integrated Report 89 4 ANNUAL FINANCIAL STATEMENTS
REPORTABLE SEGMENTS
Industrial Development Corporation Other financing activities Foskor (Pty) Ltd Scaw South Africa (Pty) Ltd Other Total Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Income Interest received 3 128 2 581 450 501 18 30 1 1 (1 245) (907) 2 352 2 206 Dividends received 1 886 2 238 985 1 145 – 4 – – (154) (283) 2 723 3 104 Fee income 424 657 43 50 – – – – – – 467 707 Farming, manufacturing and mining income – – – – 5 918 5 297 5 660 6 268 2 294 2 017 13 872 13 582 Revenue* 5 438 5 476 1 478 1 696 5 936 5 331 5 661 6 269 895 827 19 414 19 599 Share of profits of equity-accounted investments – 3 39 31 4 – – – 1 013 1 055 1 056 1 089 Other income 406 398 15 10 106 61 – – 54 194 581 663 Net capital gains 410 427 43 – – 217 – – – (4) 410 640 Expenses Financing costs (1 300) (1 170) (30) (22) (438) (215) (477) (466) 928 471 (1 317) (1 402) Operating expenses (1 400) (1 502) (574) (682) (5 790) (5 703) (6 050) (6 532) (2 010) (1 868) (15 824) (16 287) Share of losses of equity-accounted investments – – – – – (1) – – (499) (432) (499) (433) Taxation 25 (54) 8 (1) 144 188 – (161) (17) 14 167 (14) Depreciation (21) (18) (4) (4) (330) (288) (208) (195) (160) (93) (723) (598) Project feasibility expenses 289 (72) – – – – – – – (6) 289 (78) Net movement in impairments (3 670) (1 821) (380) (215) – – – – 889 510 (3 161) (1 526) Impairment of property, plant and equipment – – – – (200) – – – – – (200) – Profit for the year 177 1 667 595 813 (568) (410) (1 074) (1 085) 1 093 668 223 1 653 Total assets 122 425 125 149 2 505 2 671 8 803 7 891 4 714 5 218 (17 099) (18 640) 121 348 122 289 Interest in equity-accounted investments 15 421 15 624 929 852 – 4 – – 1 964 (717) 18 314 15 763 Total liabilities 44 425 40 289 762 570 3 740 4 636 8 872 8 562 (21 270) (21 690) 36 529 32 367 Capital expenditure 46 14 15 2 460 574 – 288 2 001 302 2 522 1 180 Capital expenditure commitments – – – – – – – 660 87 (397) 87 263 * All revenue is from external customers. Other financing activities include Findevco, Impofin, Konoil and the Small Enterprise Finance Agency Limited. Other includes Dymson Nominee, Kindoc Investments, Kindoc Sandton Properties, Konbel, Prilla, and certain other property-owning subsidiaries and consolidation adjustments.
90 Industrial Development Corporation of South Africa Limited Industrial Development Corporation Other financing activities Foskor (Pty) Ltd Scaw South Africa (Pty) Ltd Other Total Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Income Interest received 3 128 2 581 450 501 18 30 1 1 (1 245) (907) 2 352 2 206 Dividends received 1 886 2 238 985 1 145 – 4 – – (154) (283) 2 723 3 104 Fee income 424 657 43 50 – – – – – – 467 707 Farming, manufacturing and mining income – – – – 5 918 5 297 5 660 6 268 2 294 2 017 13 872 13 582 Revenue* 5 438 5 476 1 478 1 696 5 936 5 331 5 661 6 269 895 827 19 414 19 599 Share of profits of equity-accounted investments – 3 39 31 4 – – – 1 013 1 055 1 056 1 089 Other income 406 398 15 10 106 61 – – 54 194 581 663 Net capital gains 410 427 43 – – 217 – – – (4) 410 640 Expenses Financing costs (1 300) (1 170) (30) (22) (438) (215) (477) (466) 928 471 (1 317) (1 402) Operating expenses (1 400) (1 502) (574) (682) (5 790) (5 703) (6 050) (6 532) (2 010) (1 868) (15 824) (16 287) Share of losses of equity-accounted investments – – – – – (1) – – (499) (432) (499) (433) Taxation 25 (54) 8 (1) 144 188 – (161) (17) 14 167 (14) Depreciation (21) (18) (4) (4) (330) (288) (208) (195) (160) (93) (723) (598) Project feasibility expenses 289 (72) – – – – – – – (6) 289 (78) Net movement in impairments (3 670) (1 821) (380) (215) – – – – 889 510 (3 161) (1 526) Impairment of property, plant and equipment – – – – (200) – – – – – (200) – Profit for the year 177 1 667 595 813 (568) (410) (1 074) (1 085) 1 093 668 223 1 653 Total assets 122 425 125 149 2 505 2 671 8 803 7 891 4 714 5 218 (17 099) (18 640) 121 348 122 289 Interest in equity-accounted investments 15 421 15 624 929 852 – 4 – – 1 964 (717) 18 314 15 763 Total liabilities 44 425 40 289 762 570 3 740 4 636 8 872 8 562 (21 270) (21 690) 36 529 32 367 Capital expenditure 46 14 15 2 460 574 – 288 2 001 302 2 522 1 180 Capital expenditure commitments – – – – – – – 660 87 (397) 87 263 * All revenue is from external customers. Other financing activities include Findevco, Impofin, Konoil and the Small Enterprise Finance Agency Limited. Other includes Dymson Nominee, Kindoc Investments, Kindoc Sandton Properties, Konbel, Prilla, and certain other property-owning subsidiaries and consolidation adjustments.
2016 Integrated Report 91 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES The Industrial Development Corporation of South Africa Limited (IDC, Company or Corporation) is domiciled in South Africa. The consolidated financial statements for the year ended 31 March 2016 comprise the IDC, its subsidiaries and the Group’s interest in associates and jointly controlled entities (referred to as the Group). The financial statements were authorised for issue by the directors on 30 June 2016.
1.1 STATEMENT OF COMPLIANCE The separate and consolidated financial statements have been prepared in accordance with and comply with International Financial Reporting Standards (IFRS) and its interpretations adopted by the International Accounting Standards Board (IASB) as well as the requirements of the PFMA.
1.2 BASIS OF PREPARATION The separate and consolidated financial statements are presented in South African Rand, which is the Company’s functional currency, rounded to the nearest million. These consolidated financial statements are prepared on the historical cost basis, except for the following: • Derivative financial instruments are measured at fair value; • Financial instruments held-for-trading are measured at fair value; • Financial instruments classified as available-for-sale are measured at fair value; • Financial instruments designated at fair value through profit or loss are measured at fair value; • Investments in subsidiaries, associates and jointly-controlled entities are carried at fair value in the separate financial statements of the Company; • Biological assets are measured at fair value less costs to sell; • Investment property is measured at fair value; • Land and buildings are measured at revalued amount; and • Aircraft are measured at fair value. Standards, amendments and interpretations to existing standards not yet effective and also not early adopted: IFRS 9 – Financial Instruments (effective 1 January 2018) IFRS 9 – Financial Instruments will replace certain key elements of IAS 39. The two key elements that would impact the Group’s accounting policies include: • Classification and measurement of financial assets and financial liabilities: the standard requires that all financial assets be classified as either held at fair value or amortised cost. (i) The amortised cost classification is only permitted where it is held within a business model where the underlying cash flows are held in order to collect contractual cash flows and that the cash flows arise solely from payment of principal and interest. (ii) The standard further provides that gains and losses on assets held at fair value are measured through the income statement unless the entity has elected to present gains and losses on non-trading equity investments (individually elected) directly through comprehensive income. With reference to financial liabilities held at fair value, the standard proposes that changes to fair value attributable to credit risk are taken directly to other comprehensive income without recycling. • Impairment methodology: the key change is related to a shift from an incurred loss to an expected loss impairment methodology. The implementation of IFRS 9 is anticipated to have a significant impact on the preparation of the Group’s financial statements. The exact impact is still being established by the Group.
IFRS 15 – Revenue from Contracts with Customers (effective 1 January 2017) This standard replaces IAS 11 – Construction Contracts, IAS 18 – Revenue, IFRIC 13 – Customer Loyalty Programmes, and IFRIC 15 – Agreements for the Construction of Real Estate, IFRIC 18 – Transfer of Assets from Customers and SIC-31 – Revenue – Barter of Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five step analysis of transactions to determine whether, how much and when revenue is recognised. The Group is in the process of evaluating the impact of IFRS 15 on its financial statements. All other standards and interpretations issued but not yet effective are not expected to have a material impact on the Group.
1.3 INVESTMENTS IN SUBSIDIARIES Subsidiaries are entities controlled by the IDC. The Group "controls" an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. Investments in subsidiaries in the Company’s separate financial statements are carried at fair value as available-for-sale financial assets.
92 Industrial Development Corporation of South Africa Limited Business combinations The acquisition method is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. The assets, liabilities and contingent liabilities acquired are assessed and included in the statement of financial position at their estimated fair value to the Group. If the cost of acquisition is higher than the net assets acquired, any difference between the net asset value and the cost of acquisition of a subsidiary is treated in accordance with the Group’s accounting policy for goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in profit or loss. Transactions eliminated on consolidation Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Non-controlling interests Non-controlling interests (NCI) are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.
1.4 CONSOLIDATED STRUCTURED ENTITIES The Group has established a number of consolidated structured entities (CSEs) for trading and investment purposes. CSEs are entities that are created to accomplish narrow and well-defined objectives. A CSE is consolidated if, based on an evaluation of the substance of the relationship with the Group, the Group has control over the CSE. CSEs are the Group entities which are designed so that voting rights are not relevant to the determination of power, but instead other rights are relevant. CSEs controlled by the Group are generally those established under terms that impose strict limitations on the decision-making powers of the CSEs’ management and that result in the Group receiving the majority of the benefits related to the CSEs’ operations and net assets. Investments in CSEs in the Company’s separate financial statements are carried at fair value.
1.5 INVESTMENTS IN ASSOCIATES Investments in associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ post-acquisition profits and losses is recognised in profit or loss, and its share of post- acquisition movements in reserves is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted for against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains and losses arising from transactions with equity-accounted investments are eliminated against the investment to the extent of the Group’s interest in the investment. Unrealised losses are eliminated only to the extent that there is no evidence of impairment. Investments in associates in the Company’s separate financial statements are carried at fair value.
1.6 JOINT VENTURES AND PARTNERSHIPS Joint ventures and partnerships are those entities over whose activities the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. The consolidated financial statements include the Group’s share of the total recognised gains and losses of joint ventures on an equity-accounted basis, from the date that joint control is established by contractual agreement commences until the date that it ceases. When the Group’s share of losses exceeds its interest in a joint venture, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of a joint venture. Unrealised gains and losses arising from transactions with equity-accounted joint ventures and partnerships are eliminated against the investment to the extent of the Group’s interest in the investment. Investments in joint ventures and partnerships in the Company’s separate financial statements are carried at fair value.
2016 Integrated Report 93 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.7 FINANCIAL INSTRUMENTS Financial assets The Group classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition.
Financial assets at fair value through profit or loss This category has two subcategories: financial assets held-for-trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held-for-trading unless they are designated as hedging instruments. The Group designates financial assets at fair value through profit or loss when either • The assets are managed, evaluated and reported internally on a fair value basis • The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise • The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract
Loans and receivables Loans and receivables are non-derivative assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the near future. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method.
Held to maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold to maturity. If the Group were to sell anything other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale.
Available-for-sale Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.
Recognition and measurement Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on trade date – the date on which the Group commits to purchase or sell the asset. Loans are recognised when the cash is advanced to the borrowers. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently measured at fair value. Loans and receivables and held-to-maturity investments are subsequently measured at amortised cost using the effective interest method less impairment loss. Gains and losses arising from changes in the fair value of the financial instruments through profit or loss category are included in profit or loss in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in other comprehensive income, until the financial asset is disposed of, derecognised or impaired, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in profit or loss. However, interest calculated using the effective interest method is recognised in profit or loss for available-for-sale debt investments. Dividends on available-for-sale equity instruments are recognised in profit or loss when the entity’s right to receive payment is established. Financial assets (or, where applicable, a part of a financial asset or part of a group of similar financial assets) are derecognised when the contractual rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all the risks and rewards of ownership, without retaining control. Any interest in the transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.
Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks, and investments in money market instruments and bank overdrafts, all of which are available for use by the Group unless otherwise stated. Cash and cash equivalents are subsequently measured at amortised cost in the statement of financial position.
94 Industrial Development Corporation of South Africa Limited Financial liabilities Financial liabilities are recognised initially at fair value, generally being their issue proceeds net of transaction costs incurred. Financial liabilities, other than those at fair value through profit or loss, are subsequently measured at amortised cost and interest is recognised over the period of the borrowing using the effective interest method. Where the Group classifies certain liabilities at fair value through profit or loss, changes in fair value are recognised in profit or loss. This designation by the Group takes place when either: • The liabilities are managed, evaluated and reported internally on a fair value basis; or • The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; and • The liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. Financial guarantees Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are initially recognised at their fair value and the initial fair value is amortised over the life of the financial guarantee. The guarantee liability is subsequently measured at the higher of this amortised amount and the present value of any expected payment (when payment under the guarantee has become probable). Financial guarantees are included in other liabilities. Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. Derivative financial instruments Certain Group companies use derivative financial instruments to hedge their exposure to foreign exchange rate risks and other market risks arising from operational, financing and investment activities. The Group does not hold or issue derivative financial instruments for trading purposes. The derivatives that do not meet the requirements for hedge accounting are accounted for as held-for-trading instruments.
Embedded derivatives Derivatives may be embedded in another contractual arrangement (a host contract). The Group accounts for an embedded derivative separately from the host contract when the host contract is not itself carried at fair value through profit or loss, the terms of the embedded derivative would meet the definition of a derivative if they were contained in a separate contract, and the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risk of the host contract. Separated embedded derivatives are accounted for depending on their classification, and are presented in the statement of financial position together with the host contract.
Hedge accounting The following hedge relationships are applied:
Fair value hedge – a hedge of exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss.
Cash flow hedge – a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and could affect profit or loss.
Fair value hedge Changes in fair value are recognised in profit or loss. Any adjustments to the carrying amount related to the hedged risk are recognised in profit or loss.
2016 Integrated Report 95 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.7 FINANCIAL INSTRUMENTS (continued) Cash flow hedge Changes in fair value where the portion of the gain or loss is determined to be an effective hedge is recognised in other comprehensive income and the ineffective portion is recognised in profit or loss. The change in fair value recognised directly in other comprehensive income is transferred to profit or loss when the future transaction affects profit or loss. No adjustments are made to the carrying amount of the hedged item.
Discontinuation of hedge accounting The Group discontinues hedge accounting prospectively if any one of the following occurs: • The hedging instrument expires or is sold, terminated or exercised • The forecast transaction is no longer expected to occur (in the case of a cash flow hedge, the cumulative unrealised gain or loss recognised in other comprehensive income, is recognised immediately in profit or loss) • The hedge no longer meets the conditions for hedge accounting • The Group revokes the designation
1.8 IMPAIRMENT OF ASSETS Impairment of financial assets carried at amortised cost The Group assesses whether there is objective evidence that a financial asset or Group of financial assets not carried at fair value through profit or loss are impaired at each reporting date. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or Group of financial assets that can be reliably estimated. Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: • Significant financial difficulty of the issuer or obligor; • A breach of contract, such as default or delinquency in interest or principal payments; • The Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the lender would not otherwise consider; • It becoming probable that the borrower will enter bankruptcy or other financial reorganisation; • The disappearance of an active market for that financial asset resulting in financial difficulties; or • Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decreases cannot yet be identified with the individual financial assets in the group. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, referred to as specific impairments, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a Group (portfolio) of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. The recoverable amount of the assets is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of the asset). For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group, and as well as historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions which did not affect the period on which the historical loss experience is based. This also serves to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in interest rates, foreign currency exchange rates, payment status, or other factors indicative of changes in the probability of losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.
96 Industrial Development Corporation of South Africa Limited If an impairment loss decreases due to an event occurring subsequently and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), then the previously recognised impairment loss is reversed through profit or loss with a corresponding increase in the carrying amount of the underlying asset. The reversal is limited to an amount that does not state the asset at more than what its amortised cost would have been in the absence of impairment. Impairment of available-for-sale financial assets The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a decrease in the fair value of the instrument below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from other comprehensive income and recognised in profit or loss. Impairment losses recognised in profit or loss on equity instruments are not reversed through profit or loss. Any increase in the fair value after an impairment loss has been recognised is treated as a revaluation and is recognised directly in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss. Impairment of non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than biological assets, land and buildings, deferred tax assets and investment property) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or cash-generating units (CGUs). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation if no impairment loss had been recognised. Any impairment loss of a revalued asset is treated as a revaluation decrease.
1.9 INTANGIBLE ASSETS Goodwill Business combinations are accounted for using the acquisition method as at the acquisition date. The Group measures goodwill at the acquisition date as: • The fair value of the consideration transferred; plus • The recognised amount of any non-controlling interests in the acquire; plus • If the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquire; less • The net recognised amount (generally fair value) of the identifiable assets required and the liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit and loss. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Impairment losses on goodwill are recognised in profit or loss and determined in accordance with the impairment of non-financial assets. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and the settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.
2016 Integrated Report 97 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.9 INTANGIBLE ASSETS (continued) If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquirees’ awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards are included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared to the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. Intangible assets acquired separately Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses, if any. Amortisation is charged on a straight-line basis over the estimated useful lives of the intangible assets which do not exceed four years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes being accounted for on a prospective basis. Intangible assets acquired in a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are measured at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately.
1.10 FOREIGN CURRENCY TRANSLATION Transactions and balances Transactions in foreign currencies are translated into South African Rand at the foreign exchange rate prevailing at the date of the transaction. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and amortised cost in foreign currency translated at the exchange rate at the end of the reporting period, if applicable. Monetary assets and liabilities denominated in foreign currencies at the reporting date have been translated into South African Rand at the rates ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Rand at foreign exchange rates ruling at the dates the fair value was determined. Foreign currency differences are recognised in profit and loss, except for available-for-sale investments and effective cash flows hedges which are recognised in other comprehensive income. Financial statements of foreign operations All foreign operations have been accounted for as foreign operations. Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation are translated into South African Rand at foreign exchange rates ruling at the reporting date. Income and expenses are translated at the average foreign exchange rates, provided these rates approximate the actual rates, for the year. Exchange differences arising from the translation of foreign operations are recognised in other comprehensive income. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss.
1.11 INVESTMENT PROPERTY Investment property is property held either to earn rental income or for capital appreciation, or both. Measurement Investment property is measured initially at cost, including transaction costs and directly attributable expenditure in preparing the asset for its intended use. Subsequently, all investment properties are measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation takes place annually, based on the aggregate of the net annual rental receivable from the properties, considering and analysing rentals received on similar properties in the neighborhood, less associated costs (insurance, maintenance, repairs and management fees). A capitalisation rate which reflects the specific risks inherent in the net cash flows is applied to the net annual rentals to arrive at the property valuations. Gains or losses arising from a change in fair value are recognised in profit or loss.
98 Industrial Development Corporation of South Africa Limited External, independent valuers having appropriate, recognised professional qualifications and recent experience in the location and category of the property being valued are used to value the portfolio. When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.
1.12 PROPERTY, PLANT AND EQUIPMENT Measurement All items of property, plant and equipment recognised as assets are measured initially at cost. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of material and direct labour and any other cost directly attributable to bringing the asset to a working condition for its intended use, and the cost of dismantling and removing the items and restoring the site on which they are located. Except for land, buildings and aircraft all other items of property, plant and equipment are subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Land, buildings and aircraft are subsequently measured at fair value. Land, buildings and aircraft are revalued by external, independent valuers. Valuers have appropriate recognised professional qualifications and recent experience in the location and category of the property being valued are used to value the portfolio. Any surplus in excess of the carrying amount is transferred to a revaluation reserve net of deferred tax. Surpluses on revaluation are recognised in profit or loss to the extent that they reverse revaluation decreases of the same assets recognised as expenses in the previous periods. Decreases in revaluation are charged directly against the revaluation reserves only to the extent that the decrease does not exceed the amount held in the revaluation reserves in respect of that same asset, otherwise they are recognised in profit or loss. Where parts of an item of property, plant and equipment have significantly different useful lives, they are accounted for as separate items of property, plant and equipment. Although individual components are accounted for separately, the financial statements continue to disclose a single asset. Subsequent cost The Group recognises the cost of replacing part of such an item of property, plant and equipment in carrying amount when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in profit or loss as an expense as they are incurred. Depreciation Depreciation is recognised in profit or loss on a straight-line basis, based on the estimated useful lives of the underlying assets. Depreciation is calculated on the cost less any impairment and expected residual value of the asset. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows:
Average Item useful life Buildings and infrastructure • Building structure 50 years • Elevators 10 years Plant and machinery • Aircraft 5 years • Heavy plant and machinery 10 – 20 years • Equipment 8 – 10 years Other property, plant and equipment • Motor vehicles 1 – 6 years • Office furniture and equipment 1 – 6 years
The residual values, useful lives and depreciation method are re-assessed at each financial year-end and adjusted if appropriate. Derecognition The carrying amount of items of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from their use or disposal. Gains or losses arising from derecognition are determined as the difference between the net disposal proceeds and the carrying amount of the item of property, plant and equipment and included in profit or loss when the items are derecognised. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained income.
2016 Integrated Report 99 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.13 BIOLOGICAL ASSETS A biological asset is a living animal or plant. Measurement A biological asset is measured initially and at reporting date at its fair value less costs to sell. If the fair value of a biological asset cannot be determined reliably at the date of initial recognition, it is stated at cost less any accumulated depreciation and impairment losses. Gains or losses arising on the initial recognition of a biological asset at fair value less costs to sell, and from a change in fair value less costs to sell of biological assets, are included in profit or loss in the period in which they arise.
1.14 LEASES Finance leases Leases of assets under which the lessee assumes all the risks and benefits of ownership are classified as finance leases.
Finance leases – Group as lessee Finance leases are recognised as assets and liabilities in the statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease. The lease payments are apportioned between the finance charge and reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate on the remaining balance of the liability.
Finance leases – Group as lessor The Group recognises finance lease receivables in the statement of financial position. Finance income is recognised based on a pattern reflecting a constant periodic rate of return on the Group’s net investment in the finance lease. Operating leases Leases of assets under which the lessor effectively retains all the risks and benefits of ownership are classified as operating leases.
Operating leases – Group as lessee Lease payments arising from operating leases are recognised in profit or loss on a straight-line basis over the lease term. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense.
Operating leases – Group as lessor Receipts in respect of operating leases are accounted for as income on the straight-line basis over the period of the lease. The assets subject to operating leases are presented in the statement of financial position according to the nature of the assets. Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset. At inception or upon re-assessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group’s incremental borrowing rate.
1.15 SHARE CAPITAL Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of the ordinary shares are recognised as a deduction from equity, net of any tax effects.
100 Industrial Development Corporation of South Africa Limited 1.16 INVENTORIES Spares and consumables Spares and consumables are valued at the lower of cost and net realisable value, on a weighted average method. The cost of inventories comprises all costs of purchase, conversion and other costs incurred in bringing the inventories to the present location and condition. Obsolete, redundant and slow-moving items of spares and consumable stores are identified on a regular basis and written down to their net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. Raw materials, finished goods and phosphate rock Raw materials, finished goods and phosphate rock are valued at the lower of cost of production and net realisable value. Cost of production is calculated on a standard cost basis, which approximates the actual cost and includes the production overheads. Production overheads are allocated on the basis of normal capacity to finished goods. The valuation of inventory held by agents or in transit includes forwarding costs, where applicable.
1.17 PROVISIONS Provisions are recognised when: • The Group has a present obligation as a result of a past event; • It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and • A reliable estimate can be made of the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision. Provisions are not recognised for future operating losses. A constructive obligation to restructure is recognised when an entity: • Has a detailed formal plan for the restructuring, identifying at least: –– The business or part of a business concerned –– The principal locations affected –– The location, function, and approximate number of employees who will be compensated for terminating their services –– The expenditures that will be undertaken –– When the plan will be implemented –– Has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Decommissioning provision The obligation to make good environmental or other damage incurred in installing an asset is provided in full immediately, as the damage arises from a past event. If an obligation to restore the environment or dismantle an asset arises on the initial recognition of the asset, the cost is capitalised to the asset and amortised over the useful life of the asset. The cost of an item of property, plant and equipment includes not only the "initial estimate" of the costs relating to dismantlement, removal or restoration of property, plant and equipment at the time of installing the item, but also amounts recognised during the period of use, for purposes other than producing inventory. If an obligation to restore the environment or dismantle an asset arises after the initial recognition of the asset, then a provision is recognised at the time that the obligation arises. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with the contract.
2016 Integrated Report 101 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.18 CONTINGENT LIABILITIES AND COMMITMENTS Contingent liabilities A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. Contingent liabilities are not recognised in the statement of financial position of the Group to the financial statements but are disclosed in the notes. After their initial recognition contingent liabilities recognised in business combinations that are recognised separately are subsequently measured at the higher of: • The amount that would be recognised as a provision • The amount initially recognised less cumulative amortisation Commitments Items are classified as commitments where the Group has committed itself to future transactions. Commitments are not recognised in the statement of financial position of the Group to the financial statements but are disclosed in the notes.
1.19 TAXATION Current tax assets and liabilities Current tax for current and prior periods is, to the extent unpaid, recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognised as an asset. Current tax liabilities/(assets) for the current and prior periods are measured at the amount expected to be paid to/(recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Income tax Current and deferred taxes are recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from: • A transaction or event which is recognised, in the same or a different period, to other comprehensive income • A business combination Current tax is charged or credited in profit or loss, except when it relates to items credited or charged directly to equity or other comprehensive income, in which case the current tax is also recognised in equity or other comprehensive income. Current tax also includes any adjustment to tax payable in respect of previous years. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is recognised for all taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which unused tax deductions can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax will be realised. Deferred tax is not recognised if the temporary differences arise on the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable income nor accounting income. Deferred tax is also not recognised in respect of temporary differences relating to investments in associates, subsidiaries and joint ventures to the extent that it is probable that they will not reverse in the foreseeable future and the timing of the reversal of the temporary difference is controlled. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax is charged or credited in profit or loss, except when it relates to items credited or charged directly to equity or other comprehensive income, in which case the deferred tax is also recognised in equity or other comprehensive income. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
1.20 REVENUE Revenue comprises sales to customers, dividends, interest, rentals and fee income, but excludes value-added tax, and is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates.
102 Industrial Development Corporation of South Africa Limited Sales to customers Revenue from sale of goods is recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, associated costs and possible return of goods can be estimated reliably, and there is no continuing managerial involvement with the goods. Dividends Dividends income is recognised in profit or loss on the date that the Group’s right to receive payment is established. Capitalisation shares received are not recognised as income. Interest Interest income and expenses are recognised in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset (or, where appropriate, a shorter period) to the carrying amount of the financial asset. The effective interest rate is established on initial recognition of the financial asset and is not revised subsequently. Fees • Income earned on the execution of a significant act is recognised when the significant act has been performed. • Income earned from the provision of services is recognised as the service is rendered by reference to the stage of completion of the service. • Income that forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate and recognised in interest income.
Rental See policy on leases (Note 1.14).
1.21 BORROWING COSTS Borrowing costs are expensed in the period in which they are incurred, except to the extent that they are capitalised when directly attributable to the acquisition, construction or production of a qualifying asset.
1.22 EMPLOYEE BENEFITS Post-retirement medical benefits Some Group companies provide post-employment healthcare benefits to their retirees. The entitlement to post-employment healthcare benefits is based on the employee remaining in service up to retirement age. The expected costs of these benefits are accrued over the period of employment, using the projected unit of credit method. Valuations of these obligations are carried out annually by independent qualified actuaries. Defined contribution plans The majority of the Group’s employees are members of defined contribution plans and contributions to these plans are recognised in profit or loss in the year to which they relate. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and under which the Group will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and previous periods. Defined benefit plans The Group operates a defined benefit and a defined contribution plan, the assets of which are held in separate trustee- administered funds. The schemes are generally funded through payments to insurance companies or trustee-administered funds as determined by periodic actuarial valuations. A defined benefit plan is a pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service and compensation. The liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government securities that have terms to maturity approximating the terms of the related liability. Actuarial gains and losses arising from experience adjustments and the effects of changes in actuarial assumptions to the defined benefit plans are recognised fully in other comprehensive income. Past-service costs are recognised immediately in profit or loss when they occur. Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
2016 Integrated Report 103 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.23 SEGMENT REPORTING An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenue and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the executive committee to make decisions about resources allocated to each segment and assess its performance, and for which discreet financial information is available.
1.24 DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD-FOR-SALE Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held-for-sale, if earlier. A disposal group that is to be abandoned may also qualify. Non-current assets held-for-sale Non-current assets and disposal groups are classified as held-for-sale if their carrying amount will be recovered through a sales transaction rather than continuing use. This classification is only met if the sale is highly probable and the assets are available for immediate sale. Measurement Immediately before classification as held-for-sale, the measurement of the assets (and all assets and liabilities in a disposal group) is brought up-to-date in accordance with the applicable IFRS. Then, on initial classification as held-for-sale, the non-current assets and disposal groups are recognised at the lower of carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is first allocated to goodwill and then to remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property and biological assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held-for-sale are included in profit or loss, even when there is a revaluation. The same applies to gains and losses on subsequent measurement. Reclassification The non-current assets held-for-sale will be reclassified immediately when there is a change in intention to sell. At that date, it will be measured at the lower of its carrying value before the asset was classified as held-for-sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset not been classified as held-for-sale and its recoverable amount at the date of the subsequent decision not to sell.
1.25 RELATED PARTIES The IDC operates in an economic environment together with other entities directly or indirectly owned by the South African government. Only parties within the national sphere of government will be considered to be related parties. Key management is defined as individuals with the authority and responsibility for planning, directing and controlling the activities of the entity. All individuals from the level of executive management up to the Board of directors are regarded as key management per the definition of the standard. Close family members of key management personnel are considered to be those family members who may be expected to influence, or be influenced by key management individuals in their dealings with the entity.
1.26 SHARE-BASED PAYMENTS The Group company operates an equity-settled share-based plan and a cash-settled share-based plan. The equity settled share-based payments vest immediately, the reserve was recognised in equity at grant date. The cash-settled plan was entered into with one of the Group company’s employees, under which the Company receives services from employees by incurring the liability to transfer cash to the employees for amounts that are based on the value of the Company’s shares. The fair value of the transaction is measured using an option pricing model, taking into account all terms and conditions. The fair value of the services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: • Including any market performance conditions • Excluding the impact of any service and non-market performance vesting conditions • Including the impact of any non-vesting conditions The services received by the Company are recognised as they are received and the liability is measured at fair value. The fair value of the liability is remeasured at each reporting date and at the date of settlement. Any changes in the fair value are recognised in profit or loss for the period.
104 Industrial Development Corporation of South Africa Limited 1.27 DETERMINATION OF FAIR VALUES A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non‑financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Financial assets and liabilities Policy applicable from 1 April 2013 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability, nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the Instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.
Policy applicable before 1 April 2013 ‘Fair value’ is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date. When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, then the Group establishes fair value using a valuation technique. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price – i.e. the fair value of the consideration given or received. However, in some cases the initial estimate of fair value of a financial instrument on initial recognition may be different from its transaction price. If this estimated fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in profit or loss on initial recognition of the instrument. In other cases, the fair value at initial recognition is considered to be the transaction price and the difference is not recognised in profit or loss immediately, but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable. Property, plant and equipment The market value of land and buildings is the estimated amount that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Intangible assets The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. Investment property Valuation methods and assumptions used in determining the fair value of investment property.
2016 Integrated Report 105 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued) 1.27 DETERMINATION OF FAIR VALUES (continued) Capitalisation method The value of the property reflects the present value of the sum of the future benefits which an owner may expect to derive from the property. These benefits are expressed in monetary terms and are based upon the estimated rentals for the property in an orderly transaction between market participants. The usual property outgoings are deducted to achieve a net rental, which is then capitalised at a rate an investor would require to receive the income.
Comparative method The method involves the identification of comparable properties sold in the area or in a comparable location within a reasonable time. The selected comparable properties are analysed and compared with the subject property. Adjustments are then made to their values to reflect any differences that may exist. This method is based on the assumption that a purchaser will pay an amount equal to what others have paid or are willing to pay.
Residual land valuation method This method determines the residual value which is the result of the present value of expected inflows less all outflows (including income tax) less the developer’s required profits. This is the maximum that the developer can afford to pay for the real estate. This residual value is in theory also the market value of the land. Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible notes, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. For finance leases the market rate of interest is determined by reference to similar lease agreements. Share-based payment transactions A Group company entered into a Business Assistance Agreement, which is considered to be an equity-settled, share-based payment transaction. The fair value of the technical and business services received in exchange for the grant of equity instruments is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the equity instruments granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of equity instruments that are expected to vest.
1.28 USE OF ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. Income taxes Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Fair value of financial instruments The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgement to make assumptions that are mainly based on market conditions existing at each reporting date. Listed equities are valued based on their listed value (fair value) on 31 March 2014. Unlisted equities are valued based on various valuation methods, including free cash flow, price earnings (PE) and net asset value (NAV) bases. Judgements and assumptions in the valuations and impairments include determining the: • Free cash flows of investees • Replacement values • Discount or premium applied to the IDC’s stake in investees • Sector/subsector betas • Debt weighting – this is the target interest-bearing debt level • Realisable value of assets • Probabilities of failure in using the NAV-model Post-employment obligations Significant judgement and actuarial assumptions are required to determine the fair value of the post-employment obligations. More detail on these actuarial assumptions is provided in the notes to the financial statements.
106 Industrial Development Corporation of South Africa Limited Environmental rehabilitation liability In determining the environmental rehabilitation liability, an inflation rate of 5.78% (FY2016: 6.0%) was assumed to increase the rehabilitation liability for the next 20 years, and a rate of 8.39% (FY2015: 8.37%) to discount that amount to present value. The discount rate of 8.39% assumed is a risk-free rate, specifically the rate at which the R186 South African government bond was quoted at year end. Fair value of share-based payments The fair value of equity instruments on grant date is determined based on a simulated Company value, using the Geometric Brownian Motion model. The valuation technique applied to determine the simulated Company value is part of the Monte Carlo simulation methodology. Impairment of assets The Group follows the guidance of IAS 36 – Impairment of Assets to determine when an asset is impaired. This determination requires significant judgement. In making this judgement, the Group evaluates the impairment indicators that could exist at year end, such as significant decreases in the selling prices of finished goods, significant decreases in sales volumes and changes in the international export regulatory environment.
1.29 TRANSFER OF FUNCTIONS Between entities under common control Recognition The receiving entity recognises the assets and liabilities acquired through a transfer of functions on the effective date of the transfer. All income and expenses that relate to the functions transferred are also recognised from the effective date of the transfer. The recognition of these income and expenses are governed by the accounting policies related to those specific income and expenses and, accordingly, this policy does not provide further guidance thereon.
Measurement Assets and liabilities acquired by the receiving entity through a transfer of functions are measured at initial recognition at the carrying value that they were transferred. The difference between the carrying value of the assets and liabilities transferred and any consideration paid for the assets and liabilities transferred is recognised in equity. The carrying value at which the assets and liabilities are initially recognised is therefore the deemed cost thereof. Therefore, the subsequent measurement of these assets and liabilities the accounting policies relevant to those assets and liabilities are followed. Accordingly, this accounting policy does not provide additional guidance on the subsequent measurement of the transferred assets and liabilities.
Derecognition The transferring entity derecognises the assets and liabilities on the effective date of the transfer of functions. These transferred assets and liabilities are measured at their carrying values upon derecognition. The resulting difference between the carrying value of the assets and liabilities transferred and any consideration received for the assets and liabilities transferred is recognised in equity. Between entities that are not under common control Recognition The receiving entity recognises the assets and liabilities acquired through a transfer of functions on the effective date of the transfer. All income and expenses that relate to the functions transferred are also recognised from the effective date of the transfer. The recognition of these income and expenses are governed by the accounting policies related to those specific income and expenses and accordingly this policy does not provide further guidance thereon.
Measurement Assets and liabilities acquired by the receiving entity through a transfer of functions are measured at initial recognition at the fair value that they were transferred. The difference between the fair value of the assets and liabilities transferred and any consideration paid for the assets and liabilities transferred is recognised in profit or loss. The fair value of these assets and liabilities is therefore deemed cost of thereof. Therefore, the subsequent measurement of these assets and liabilities the accounting policies relevant to those assets and liabilities are followed. Accordingly, this accounting policy does not provide additional guidance on the subsequent measurement of the transferred assets and liabilities.
Derecognition The transferring entity derecognises the assets and liabilities on the effective date of the transfer of functions. These transferred assets and liabilities are measured at their fair values upon derecognition. The resulting difference between the fair value of the assets and liabilities transferred and any consideration received for the assets and liabilities transferred is recognised in profit or loss.
1.30 PREPARATION OF THE ANNUAL FINANCIAL STATEMENTS The financial results have been prepared under the supervision of Nonkululeko Veleti CA(SA), the Group’s Chief Financial Officer.
2016 Integrated Report 107 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
2. FINANCIAL ASSETS AND LIABILITIES The table below sets out the Group’s classification of each class of financial assets and liabilities, and their fair values.
Other Held-for- Loans and Available- amortised Figures in Rand million Notes trading receivables for-sale cost Total Fair value Group – 2016 Cash and cash equivalents 5 – 6 865 – – 6 865 6 865 Loans and advances to clients 8 – 23 928 – – 23 928 23 011 Investments – listed equities 9 – – 38 746 – 38 746 38 746 Investments – unlisted equities 9 – – 7 034 – 7 034 7 034 Investments – preference shares 9 91 – 7 401 – 7 492 7 492 Derivative assets 19 69 – – – 69 69 Trade and other receivables 6 – 3 003 – – 3 003 3 003 Loans 22 – – – 27 984 27 984 27 023 Derivative liabilities 19 59 – – – 59 59 Bank overdrafts 5 – – – 38 38 38 Trade and other payables 20 – – – 3 332 3 332 3 332
Other Held-for- Loans and Available- amortised Figures in Rand million Notes trading receivables for-sale cost Total Fair value Group – 2015 Cash and cash equivalents 5 – 8 257 – – 8 257 8 257 Loans and advances to clients 8 – 22 412 – – 22 412 22 032 Investments – listed equities 9 – – 43 519 – 43 519 43 519 Investments – unlisted equities 9 – – 7 747 – 7 747 7 747 Investments – preference shares 9 140 – 5 945 – 6 085 6 085 Derivative assets 19 4 – – – 4 4 Trade and other receivables 6 – 2 869 – – 2 869 2 869 Loans 22 – – – 24 005 24 005 22 460 Derivative liabilities 19 56 – – – 56 56 Bank overdrafts 20 – – – 44 44 44 Trade and other payables 20 – – – 3 354 3 354 3 354
Other Held-for- Loans and Available- amortised Figures in Rand million Notes trading receivables for-sale cost Total Fair value Company – 2016 Cash and cash equivalents 5 – 6 183 – – 6 183 6 183 Loans and advances to clients 8 – 23 451 – – 23 451 22 988 Investments – listed equities 9 – – 15 227 – 15 227 15 227 Investments – Unlisted equities 9 – – 6 403 – 6 403 6 403 Investments – preference shares 9 91 – 7 401 – 7 492 7 492 Derivative assets 19 62 – – – 62 62 Trade and other receivables 6 – 906 – – 906 906 Loans 22 – – – 38 987 38 987 38 623 Derivative liabilities 19 44 – – – 44 44 Trade and other payables 20 – – – 617 617 617
Other Held-for- Loans and Available- amortised Figures in Rand million Notes trading receivables for-sale cost Total Fair value Company – 2015 Cash and cash equivalents 5 – 7 714 – – 7 714 7 714 Loans and advances to clients 8 – 21 760 – – 21 760 21 350 Investments – listed equities 9 – – 21 564 – 21 564 21 564 Investments – unlisted equities 9 – – 7 510 – 7 510 7 510 Investments – preference shares 9 140 – 5 945 – 6 085 6 085 Trade and other receivables 6 – 1 065 – – 1 065 1 065 Loans 22 – – – 33 566 33 566 32 058 Derivative liabilities 19 50 – – – 50 50 Trade and other payables 20 – – – 953 953 953
108 Industrial Development Corporation of South Africa Limited 3. FINANCIAL RISK MANAGEMENT FINANCIAL RISK This risk category encompasses losses that may occur as a result of the way the IDC is financed and its own financing or investment activities. Financial risk includes credit and settlement risk related to the potential for counterparty default, market risk related to volatility in interest rates, exchange rates, commodity and equity prices, liquidity/funding risk related to the cost of maintaining various financial positions, as well as financial compliance risk. Other financial risks faced by the Corporation include the risk of concentration of investments in certain economic sectors, regions and/or counterparties as well as the risk of over-dependency in relation to income on a limited number of counterparties and/or financial products and the risk of margin erosion due to inappropriate pricing relative to the cost of funding. The management of these risk areas is therefore critical for the IDC.
FINANCIAL: CREDIT RISK This refers to the risk that a counterparty to a financial transaction will fail to meet its obligations in accordance with the agreed terms and conditions of the contract, either because of bankruptcy or for any other reason, thereby causing the asset holder to suffer a financial loss. Credit risk, as defined by the IDC, comprises the potential loss on loans, advances, guarantees, quasi-equity and equity investments due to counterparty default. Credit risk arises as a result of the Corporation’s lending activities as well as the placement of deposits with financial institutions.
APPROACH TO MANAGING CREDIT RISK The IDC endeavours to maintain credit risk exposure within acceptable parameters, managing the credit risk inherent in the entire portfolio as well as the risk associated with individual clients or transactions. The effective management of credit risk is a critical component of a comprehensive approach to risk management and is essential to the long-term success of the Corporation. This is the dominant risk within the IDC as the providing of loans, advances, quasi equity, equity investments and guarantees represent the Corporation’s core business.
MANAGING CREDIT RISK CONCENTRATION Risk concentrations can arise in a financial organisation’s assets, liabilities or off-balance sheet items, through the execution or processing of transactions (either product or service), or through a combination of exposures across these broad categories. The potential for loss reflects the size of the position and the extent of loss given a particular adverse circumstance. The IDC can be exposed to various forms of credit risk concentration which, if not properly managed, may cause significant losses that could threaten its financial health. Accordingly, the IDC considers the management (including measurement and control) of its credit concentrations to be of vital importance. There is recognition in Basel II that portfolios of financial institutions can exhibit credit concentrations and that prudently managing such concentrations is one of the important aspects in effective credit risk management. However, despite the recognition of credit concentrations as important sources of risk for portfolios, there is no generally accepted approach or methodology for dealing with the issue (including measurement) of concentration particularly with respect to sector or industry concentration. Concentrations within a lending and/or investment portfolio can be viewed in a variety of ways: by borrower, product type, collateral type, geography, economic sector and any other variables that may be associated with a group of credits. Investment or credit concentrations are considered to be a large group of exposures that respond similarly to the same stresses. These stresses can be: • Sensitivity to a certain industry or economic factors • Sensitivity to geographical factors, either a single country or region of interlinked ones • Sensitivity to the performance of a single company or counterparty; and/or • Sensitivity to a particular risk mitigation technique, e.g. a particular collateral type. The IDC has various established methodologies for the management of the credit concentrations it is exposed to and has established risk concentration limits and policies for: • Individual and groups of counterparties and/or related parties • Geographical locations and • Economic sectors. The concentration limits are reviewed on an annual basis or sooner should the need arise. The status of the IDC investment book is reported to IDC Executive Management, the Board Risk and Sustainability Committee and the IDC Board on a regular basis.
2016 Integrated Report 109 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. FINANCIAL RISK MANAGEMENT (continued) COUNTERPARTY AND RELATED PARTY LIMITS The need for counterparty and related party limits is to identify and protect the IDC’s statement of financial position and statement of comprehensive income from significant losses/volatility which threaten financial sustainability, should a counterparty default or experience material loss in value. A counterparty is defined as IDC’s client, whereas a related party is any legal entity to whom the IDC has a credit exposure, which has one or more of the following similarities with another client which IDC has or had a credit exposure to: • Shareholding of more than 50%, • Management control, • Revenue or expenses reliance of 51% or more, and/or • Provision of security for 51% or more of IDC’s exposure. The Basel principles for the management of credit risk indicate in particular, that an important element of credit risk management is the establishment of exposure limits on single counterparties and groups of connected counterparties. In determining the recommended counterparty limit for the IDC, its strategic objectives are taken into account.
GEOGRAPHICAL/REGIONAL LIMITS AND COUNTRY THRESHOLD The focus of the IDC’s activities in the African continent is determined by its mandate, and investment is driven by the IDC’s Rest of Africa engagement strategy and managed through our investment criteria and regional investment limits, including country boundaries. In order for IDC to achieve its mandate in the rest of SADC and the rest of Africa, the Corporation focuses on being a catalyst for sustainable economic change. The IDC views Africa in terms of South Africa, the southern African region and the rest of Africa. This distinction is evident from the importance that the South African Government places on southern Africa relative to the rest of the continent. As such the Corporation’s activities are weighted in favour of Southern Africa in terms of budget allocation and resultant exposure. The IDC’s objectives are to contribute to the economic integration and industrial development in SADC and the Rest of Africa. Given the importance of the IDC’s mandate and its objectives, in conjunction with the consistent improvement of the African economic landscape, both in performance and risk profile, portfolio and regional limits and country thresholds are reviewed at least on an annual basis in order to support and enhance the developmental objectives of the IDC’s strategy as well as its vision and mission statement. The IDC continues to diversify its regional funding profile from being historically concentrated in the developed regions to other less-developed provinces. Should approval of a transaction result in breach of this limit explicit approval is required from the Board Investment Committee.
GEOGRAPHICAL ANALYSIS Group Company Loans and advances Investment Loans and advances Investment to clients securities to clients securities Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 Carrying amount as per Notes 8 and 9 23 928 22 412 53 272 57 351 23 451 21 760 29 122 35 159 Concentration by location: South Africa 16 410 16 398 50 634 54 697 15 933 15 746 26 484 32 505 SADC 3 319 2 742 1 081 867 3 319 2 742 1 081 867 Rest of Africa 4 199 3 272 117 87 4 199 3 272 117 87 Outside Africa – – 1 440 1 700 – – 1 440 1 700 23 928 22 412 53 272 57 351 23 451 21 760 29 122 35 159
Carrying value of available-for-sale investments excludes investments in subsidiaries, associates and joint ventures.
ECONOMIC SECTOR LIMITS Sector concentration remains one of the key strategic priorities of the Corporation. Concentration risk in the context of sectors generally results from an uneven distribution of an institution’s exposure to industry sectors which can generate losses large enough to jeopardise its solvency or profitability. In particular, sector concentration arises because business conditions and hence default risk may be linked across and within industry sectors within the economy. Concentrations of credit exposures in sectors can pose risks to the earnings and capital of any financial institution in the form of unexpected losses. One of the risk management techniques of managing sector risk concentration entails the establishment of concentration limits, and the monitoring and analysis thereof. The monitoring and limiting of the concentration of exposures in certain sectors is necessary to reduce the risk of an exposure to a significant downturn in a particular industry in time, and thus to be able to avoid losses, as far as possible, by implementing counter measures (e.g. withdrawing from, reducing or hedging certain exposures). Experience has shown that the earlier risks are identified, the more effectively they can be countered.
110 Industrial Development Corporation of South Africa Limited Although the IDC’s business cuts across a number of sectors, it could be exposed to concentration risk by virtue of disproportionately large exposures in any of these sectors. Managing and monitoring such concentrations to limit downside potential is therefore an integral part of an effective risk management programme. To avoid undue losses due to associated exposures, the IDC strives to identify potential common risk factors and minimise its aggregate exposure to these risk factors. By spreading its risk over many sectors instead of a few, the IDC can minimise the collective impact of economic events or trends on its earnings and capital. Sector diversification should, by reducing dependence on specific sectors, assist in obtaining assets whose performance is not affected by the same external factors. The goal of sector limits is for the IDC to attempt to diversify or at least identify its portfolio concentrations based on exposures to sectors and to identify concentrations of exposures that could become closely related, especially during a crisis; this provides an important mechanism to protect the long-term financial sustainability of the IDC. The key challenge to establish a sector limit methodology is to ensure that it is effective in protecting the institution from credit events and be practical in its enforcement. The establishment of sector limits is aligned with the overall strategy of the IDC (including its risk appetite).
SECTORAL ANALYSIS Group Company Loans and advances Investment Loans and advances Investment to clients securities to clients securities Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 Carrying amount as per Notes 8 and 9 23 928 22 412 53 272 57 351 23 451 21 760 29 122 35 159 Concentration by sector, as per Standard Industrial Classifications (SIC): Agriculture, forestry and fishing 1 053 1 513 108 79 1 036 1 446 108 79 Basic chemicals 813 118 498 739 800 118 498 739 Basic iron and steel 509 39 2 167 2 325 500 39 2 167 2 325 Basic non-ferrous metals 1 17 5 612 9 001 1 17 5 612 9 001 Beverages 10 13 – – 10 9 – – Building construction 254 413 179 48 250 281 179 48 Business services 47 110 155 39 46 66 155 39 Catering and accommodation services 3 149 2 348 41 37 3 098 2 335 41 29 Coal mining 659 583 2 117 85 648 583 2 117 85 Coke and refined petroleum products 28 5 95 – 28 5 95 – Communication 1 584 1 809 2 7 1 559 1 807 2 7 Electrical machinery 48 339 226 35 47 339 226 35 Electricity, gas and steam 3 959 2 616 3 029 2 209 3 895 2 615 3 029 2 209 Finance and insurance 571 560 36 203 562 559 36 203 Food 1 626 1 487 96 42 1 600 1 471 96 42 Footwear 85 77 – – 84 75 – – Furniture 298 295 – 377 293 295 – 377 Glass and glass products 87 110 – – 85 110 – – Gold and uranium ore mining 317 329 1 202 907 312 329 1 202 907 Government – 15 – – – 15 – – Leather and leather products 15 18 – – 15 18 – – Machinery and equipment 474 439 – – 466 439 – – Medical, dental and other health and veterinary services 380 315 1 971 2 356 374 305 1 971 2 356 Metal products excluding machinery 679 827 13 54 668 825 13 54 Motor vehicles, parts and accessories 869 1 048 124 84 855 1 036 124 84
2016 Integrated Report 111 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. FINANCIAL RISK MANAGEMENT (continued) SECTORAL ANALYSIS (continued)
Group Company Loans and advances Investment Loans and advances Investment to clients securities to clients securities Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 Non-metallic minerals 513 470 426 268 505 467 426 268 Other community, social and personal services 298 331 1 865 1 641 294 324 1 865 1 641 Other chemicals and man-made fibres 626 1 005 24 296 22 093 616 746 146 137 Other industries 30 56 – 228 30 44 – – Other mining 2 364 2 767 7 340 13 227 2 208 2 823 7 340 13 227 Other services – – 445 222 – – 445 222 Other transport equipment 267 134 1 028 755 263 134 1 028 755 Paper and paper products 154 33 20 18 152 32 20 18 Plastic products 182 190 – – 179 190 – – Printing, publishing and recorded media 19 28 – – 18 23 – – Professional and scientific equipment 67 70 35 61 66 70 35 61 Rubber products 1 4 – – 1 4 – – Television, radio and communication equipment 3 17 6 1 3 16 6 1 Textiles 287 256 1 1 282 254 1 1 Transport and storage 534 544 47 87 525 482 47 87 Water supply 390 327 – – 384 327 – – Wearing apparel 260 292 – – 256 290 – – Wholesale and retail trade 21 75 – – 21 34 – – Wood and wood products 397 370 92 122 416 363 92 122 23 928 22 412 53 272 57 351 23 451 21 760 29 122 35 159
Carrying value of available-for-sale investments excludes investments in subsidiaries, associates and joint ventures.
INTERNAL RATING MODEL AND PRICING The IDC has well developed and tested Internal rating and pricing models which has served it well in the past. The changing banking regulatory requirements and increased focus by international and local Development Finance Institutions to incorporate Basel II best practice risk management made it increasingly important for the IDC to regularly measure credit risk and ensure that risk costs are transparent and appropriately accounted for. To this end, the Corporation employed the services of consultants during the past financial year to redesign its Project Finance and SME/middle market rating and pricing methodology and models. The new methodology will be fully implemented during the 2017 financial year. The key objectives of internal rating methodologies and related rating models are: • To assess the overall credit or investment risk on a quantitative and objective basis; • To objectively determine the credit quality of individual clients as well as the portfolio; • To aid in portfolio analysis; • To allow migration analysis of individual clients as well as the portfolio; and • To assist in identifying which clients are due for review.
112 Industrial Development Corporation of South Africa Limited MAXIMUM CREDIT RISK EXPOSURE Group Company Loans and advances Investment Loans and advances Investment to clients securities to clients securities Figures in Rand million 2016 2015 2016 2015 2016 2015 2016 2015 Carrying amount as per Notes 8 and 9 23 928 22 412 53 272 57 351 23 451 21 760 29 122 35 159 Individually impaired Low risk 250 370 1 800 1 602 223 266 1 800 1 602 Medium risk 2 987 2 309 521 561 2 843 2 242 520 558 High risk 3 050 2 975 987 1 167 2 767 2 743 992 1 162 Gross amount 6 287 5 654 3 308 3 330 5 833 5 251 3 312 3 322 Allowance for impairment (5 058) (3 729) (2 049) (2 307) (4 490) (3 412) (2 049) (2 307) Carrying amount 1 229 1 925 1 259 1 023 1 343 1 839 1 263 1 015 Past due but not impaired Low risk 299 312 – – 67 85 – – Medium risk 1 588 1 494 – – 1 456 1 486 – – High risk 123 262 – – 199 256 – – Carrying amount 2 010 2 068 – – 1 722 1 827 – – Past due comprises of: 0 – 30 days 250 281 – – 78 61 – – 31 – 60 days 59 65 – – 56 62 – – 61 – 90 days 59 58 – – 66 57 – – 91 – 120 days 33 32 – – 13 29 – – 120 days 1 609 1 632 – – 1 509 1 618 – – Carrying amount 2 010 2 068 – – 1 722 1 827 – – Neither past due nor impaired Low risk 5 125 7 176 39 876 38 638 4 950 6 850 11 891 16 683 Medium risk 14 873 10 618 12 137 17 690 14 735 10 574 15 968 17 461 High risk 1 249 1 043 – – 1 249 1 078 – – Carrying amount 21 247 18 837 52 013 56 328 20 934 18 502 27 859 34 144 Portfolio impairment (558) (418) – – (548) (408) – – Total carrying amount 23 928 22 412 53 272 57 351 23 451 21 760 29 122 35 159 Carrying value of renegotiated loans 4 598 2 191 4 680 2 460
The IDC loan book is reviewed on a regular basis by IMC loans, which monitors and manages the quality and arrears on a proactive basis. Clients are classified according to their risk profiles based on the most recent available financial information and repayment profile. A low-risk client is a client that is not in arrears and for which no impairment triggers have been identified. A medium-risk client is one who is in arrears by more than 60 days and/or for which impairment triggers have been identified. A high-risk client is one who is in arrears and/or for whom impairment triggers have been identified and who fails to respond to initial legal action (e.g. letter of demand). High risk clients include those for whom legal action is in progress or where the client has ceased manufacturing or has been placed in liquidation.
IMPAIRED LOANS AND INVESTMENTS Impaired loans and investments are loans and investments for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/investment agreements.
PAST DUE BUT NOT IMPAIRED LOANS These are loans and securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of level of security/collateral available and/or the stage of collection of amounts owed to the Group.
2016 Integrated Report 113 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. FINANCIAL RISK MANAGEMENT (continued) ALLOWANCES FOR IMPAIRMENT The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance on the entire portfolio.
RENEGOTIATED LOANS Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position and where the Group has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category independent of satisfactory performance after restructuring.
COLLATERAL The Group holds collateral against loans and advances to clients in the form of mortgage bonds over property, other registered securities over assets and guarantees. Estimates of fair values are based on the value of collateral assessed at the time of borrowing and are generally not updated except when a loan is individually assessed as impaired. An estimate of the fair value of collateral held against financial assets is shown below:
Group Company Figures in Rand million 2016 2015 2016 2015 IDC financing activities Against impaired assets General notarial bond 12 27 12 27 Special notarial bonds 251 109 251 109 Mortgage bond 560 326 560 326 Other 30 36 30 36 853 498 853 498 Gross value of impaired loans as at 31 March 6 287 5 654 5 833 5 251 IDC financing activities Against loans in arrears and not impaired General notarial bond 702 805 702 805 Mortgage bond 199 193 199 193 Special notarial bond 190 183 190 183 Other 5 21 5 21 1 096 1 202 1 096 1 202 Gross value of loans in arrears not impaired as at 31 March 2 010 2 068 1 722 1 827
LIQUIDITY RISK Liquidity risk refers to the risk that the Group will not be able to meet its obligations promptly for all maturing liabilities, increase in financing assets, including commitments and any other financial obligations (funding liquidity risk), or will only able to do so at materially disadvantageous terms (market liquidity risk) Sources of liquidity risk include: • Unpredicted accelerated drawdowns on approved financing or call-ups of guarantee obligations; • Inability to roll and/or access new funding; • Unforeseen inability to collect what is contractually due to the Group; • Liquidity stress at subsidiaries and/or other SOEs; • A recall without due notice of on-balance sheet funds managed by the Group on behalf of third parties; • A breach of covenant(s), resulting in the forced maturity of borrowing(s); and • Inability to liquidate assets in a timely manner with minimal risk of capital losses. Day-to-day liquidity management is performed by Corporate Treasury within Board-approved treasury limits, such that: • At all times, there is sufficient readily-available liquidity to meet probable operational cash flow requirements for a rolling three-month period; and • Excess liquidity is minimised in order to limit the consequential drag on profitability. Liquidity coverage ratios are used to ensure that suitable levels of unencumbered high-quality liquid assets are held to protect against unexpected yet plausible liquidity stress events. Two separate liquidity stresses are considered: firstly an acute three-month liquidity stress (Scenario 1) impacting strongly on both funding and market liquidity, and secondly, a protracted 12-month liquidity stress (Scenario 2) impacting moderately on both funding and market liquidity. Approved high-quality liquid assets include cash, near-cash, committed facilities, as well as a portion of the Group’s listed equity investments.
114 Industrial Development Corporation of South Africa Limited CONSOLIDATED LOCAL AND FOREIGN CURRENCY LIQUIDITY COVERAGE
Scenario 1 Scenario 2 2016 Approved high-quality liquid assets 12 474.6 12 474.6 Net stressed outflows (5 488.2) (5 938.0) Liquidity coverage ratios (%) 227.3 529.0 2015 Approved high-quality liquid assets 10 992.6 10 992.6 Net stressed outflows (6 580.5) (9 474.1) Liquidity coverage ratios (%) 167.1 116.1
Structural liquidity mismatch ratios are used to ensure adequate medium to long-term liquidity mismatch capacity. This is done by restricting, within reasonable levels, potential future borrowing requirements related to existing business. The structural liquidity mismatch is based on conservative cash flow profiling with the added assumption that liquidity in the form of high- quality liquid assets are treated as readily available (i.e. recognised in the first time bucket).
CONSOLIDATED LOCAL AND FOREIGN CURRENCY STRUCTURAL LIQUIDITY MISMATCH (SLM)
0 – 18 0 – 24 0 – 36 months months months 2016 Cumulative liquidity positive variance 6 150.8 3 357.9 6 248.8 Funding-related liabilities 18 898.7 17 451.6 14 452.7 SLM (%) 32.5 19.2 42.2 2015 Cumulative liquidity positive variance 5 105.8 4 313.7 4 650.5 Funding related liabilities 28 860.3 20 085.1 14 351.2 SLM (%) 17.7 21.5 32.4
MARKET RISK Market risk is the risk that the value of a financial position or portfolio will decline due to adverse movements in market rates. In respect of market risk, the Group is exposed to interest rate risk, exchange rate risk and equity price risk. Market risk is governed by the Asset and Liability Management policy, and the Asset and Liability Committee (ALCO) provides the objective oversight and makes delegated decisions related to market risk exposures.
INTEREST RATE RISK Interest rate risk is the risk that adverse movements in market interest rates may cause a reduction in the IDC’s future net interest income and/or economic value of its shareholder's equity. Sources of interest rate risk include: • Repricing risk, as a result of interest-bearing assets and liabilities which reprice within different periods. This also includes the endowment effect caused by an overall quantum difference between interest-bearing assets and liabilities; • Basis risk, as a result of the imperfect correlation between interest rate changes on interest-bearing assets and liabilities which reprice within the same period (spread volatility); • Yield curve risk, as a result of unanticipated yield curve shifts (twists and pivots); and • Optionality, as a result of embedded options in the Group’s assets and liabilities. This risk is mitigated by imposing contract breakage penalties on prepayments and early settlements. The sensitivity to interest rate shocks and/or changes in interest-bearing balances is measured by means of earnings and economic value approaches. The former focuses on quantifying the impact on net interest income over the next 12 months whereas the latter is used to gauge the impact on the fair market values of assets, liabilities and equity.
2016 Integrated Report 115 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. FINANCIAL RISK MANAGEMENT (continued) INTEREST RATE SENSITIVITY MISMATCH – FINANCE ACTIVITIES RSA and RSL (rate sensitive assets and rate sensitive liabilities)
0 – 3 4 – 6 7 – 12 months months months Interest rate sensitivity mismatch – March 2016 Cumulative interest rate sensitivity SA Rand 2 735.4 2 902.1 3 510.6 US Dollar 113.7 (63.6) (56.6) Euro (40.1) (42.2) (42.4) Interest rate sensitivity mismatch – March 2015 Cumulative interest rate sensitivity SA Rand 6 247.6 6 328.2 7 241.6 US Dollar 98.0 (153.4) (130.2) Euro (26.0) (47.9) (50.6)
Furthermore, interest rate risk management is monitored through the sensitivity analyses done to the financial assets and liabilities. A 100 basis points (bps) increase/(decrease) in market interest rates resulted in the following sensitivities:
NEXT 12 MONTHS NET INTEREST INCOME SENSITIVITY Effect of a 100 basis point increase/(decrease) in market rates:
Rand US Dollar Euro 2016 R million + 100 bps rate shock 57.5 (0.1) (0.3) - 100 bps rate shock (57.5) 0.1 0.3 2015 R million + 100 bps rate shock 62.1 (0.6) (0.4) - 100 bps rate shock (62.1) 0.6 0.4
EXCHANGE RATE RISK Exchange risk is the risk that adverse changes in exchange rates may cause a reduction in the Group’s future earnings and/or its shareholder's equity. In the normal business, the Group is exposed to exchange rate risk, through its trade finance book and exposure to investments in and outside Africa. The risk is further divided into: • Transaction risk arising from transactions undertaken by the Group in a foreign currency that will ultimately require an actual conversion in the foreign exchange markets from one currency to another, thus having a direct cash effect; and • Translation risk arising from the periodic translation consolidation of the financial statements of the Group and its subsidiaries and affiliates for the purpose of uniform reporting to shareholders. • Any open (unhedged) position in a particular currency that gives rise to exchange rate risk. Open positions can be either short (i.e. the Group will need to buy foreign currency to close the position) or long (i.e. the Group will need to sell foreign currency to close the position) with the net open foreign currency position referring to the sum of all open positions (spot and forward) in a particular currency. For purposes of hedging, net open foreign currency positions are segmented into the following components: • All exposures related to foreign currency-denominated lending and borrowing; and • All foreign currency-denominated payables in the form of operating and capital expenditure, as well as foreign currency- denominated receivables in the form of dividends and fees.
116 Industrial Development Corporation of South Africa Limited US Dollar Euro Net open foreign currency positions – 2016 Foreign currency lending and borrowing 0.3 (1.4) – Loans (assets) 478.5 30.7 – Derivative hedges (FECs) 45.5 114.6 – Borrowings (liabilities) (523.7) (146.7) Other net (payables)/receivables 0.9 2.3 Net open foreign currency positions 1.2 0.9 Net open foreign currency positions – 2015 Foreign currency lending and borrowing 4.4 (0.7) – Loans (assets) 4 47.2 35.0 – Derivative hedges (FECs) 88.5 73.4 – Borrowings (liabilities) (531.3) (109.1) Other net (payables)/receivables 6.0 0.3 Net open foreign currency positions 10.4 (0.4)
The Group does not hedge its exchange rate risk on foreign currency-denominated shareholder loans, equity and quasi-equity investments.
EQUITY PRICE RISK Equity price risk is the risk that adverse movements in equity prices may cause a reduction in the value of the Group’s investments in listed and/or unlisted equity investments, and therefore also its future earnings and/or value of its shareholder’s equity. Sources of equity price risk include: • Systematic risk or volatility in relation to the market as a whole; and • Unsystematic risk or company-specific risk factors. The investment portfolio’s beta is used as an indication of systematic risk which is not diversifiable. In light of the long-term nature of the Group’s investments, unsystematic risk is managed by means of diversification. Sensitivity analysis was performed on the Group’s equity portfolio, to determine the possible effect on the fair value should a range of variables change, e.g. cash flows, earnings, net asset values etc. These assumptions were built into the applicable valuation models. In calculating the sensitivities for investments, the key input variables were changed in a range from -10% to +10%. The effect of each change on the value of the investment was then recorded. The key variables that were changed for each valuation technique were as follows: • Discounted cash flow: Net income before interest and tax • Price earnings: Net income • Listed companies: Share price • Forced sale net asset value: Net asset value From the table below it is evident that a 10% increase in the relevant variables will have a R7 889 million increase in the equity values as at 31 March 2016 (2015: R9 433 million) whereas a 10% decrease will have a R7 148 million decrease in the equity values as at 31 March 2016 (2015: R8 727 million).
10% 10% increase decrease Period 31 March 2016 R7 889m R7 148m 31 March 2015 R9 433m R8 727m
CAPITAL MANAGEMENT The IDC is accountable to its sole shareholder, the Economic Development Department. The performance as well as management of IDC capital is supported by the agreement between the Corporation and the shareholder in the form of the Shareholder’s Compact which outlines the agreements between the two parties.
REGULATORY CAPITAL The IDC is not required by law to keep any level of capital but has to utilise its capital to achieve the shareholder’s mandate. The IDC Act of 1940, as amended, dictates that the IDC can be geared up to a 100% of its capital.
RISK APPETITE The Board-approved risk appetite limit serves as a monitoring tool to ensure that the impact of investment activities in the Corporation do not have a negative impact on the Corporation’s financial position. There were no changes to the Group’s approach to capital management during the year.
2016 Integrated Report 117 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
4. FAIR VALUE INFORMATION The table below analyses assets and liabilities carried at fair value:
Figures in Rand million Level 1 Level 2 Level 3 Total Group 2016 Derivative assets – 69 – 69 Biological assets – – 215 215 Investment property – 362 – 362 Land and buildings – – 3 141 3 141 Aircraft – 126 – 126 Listed shares 38 746 – – 38 746 Unlisted shares – – 7 034 7 034 Preference shares – 91 7 401 7 492 Assets held-for-sale – 118 – 118 38 746 766 17 791 57 303 Derivative liabilities – 59 – 59 Group 2015 Derivative assets – 4 – 4 Biological assets – – 247 247 Investment property – 299 – 299 Land and buildings – – 3 192 3 192 Aircraft – 118 – 118 Listed shares 43 519 – – 43 519 Unlisted equities – – 7 747 7 747 Preference shares – 140 5 945 6 085 Assets held-for-sale – 65 – 65 43 519 626 17 131 61 276 Derivative liabilities – 56 – 56 Company 2016 Derivative assets – 62 – 62 Investment property – 15 – 15 Aircraft – 123 – 123 Listed shares 15 227 – – 15 227 Unlisted shares – – 6 403 6 403 Preference shares – 91 7 401 7 492 Investments in subsidiaries 34 514 – 12 373 46 887 Investments in associates 1 211 – 14 210 15 421 50 952 291 40 387 91 630 Derivative liabilities – 44 – 44 Company 2015 Derivative assets – – – – Investment property – 15 – 15 Aircraft – 118 – 118 Listed shares 21 564 – – 21 564 Unlisted shares – – 7 510 7 510 Preference shares – 140 5 945 6 085 Investments in subsidiaries 31 964 – 11 451 43 415 Investments in associates 1 450 – 14 174 15 624 54 978 273 39 080 94 331 Derivative liabilities – 50 – 50
118 Industrial Development Corporation of South Africa Limited RECONCILIATION OF ASSETS AND LIABILITIES MEASURED AT LEVEL 3
Gains/ losses Gains/ recognised losses in other recognised compre- Transfers Transfers Opening in profit hensive into out of Closing balance or loss income Purchases Sales level 3 level 3 balance Group – 2016 Assets Biological assets 247 (50) – 33 (15) – – 215 Land and buildings 3 192 (80) 39 137 (17) – (130) 3 141 Unlisted shares 7 747 – (736) 2 500 (2 477) – – 7 034 Preference shares 5 945 (76) (811) 2 378 (35) – – 7 401 17 131 (206) (1 508) 5 048 (2 544) – (130) 17 791 Group – 2015 Assets Biological assets 43 186 – 18 – – – 247 Land and buildings 2 520 (42) 763 72 (139) 18 – 3 192 Unlisted shares 8 356 – (1 136) 265 (3) 265 – 7 747 Preference shares 5 792 (118) (319) 1 169 (579) – – 5 945 16 711 26 (692) 1 524 (721) 283 – 17 131 Company – 2016 Assets Unlisted shares 7 510 – (1 236) 2 613 (2 484) – – 6 403 Preference shares 5 945 252 (811) 2 050 (35) – – 7 401 Investments in subsidiaries 11 451 – (1 254) 2 176 – – – 12 373 Investments in associates 14 174 (49) (1 471) 1 897 (341) – – 14 210 39 080 203 (4 772) 8 736 (2 860) – – 40 387 Company – 2015 Assets Unlisted shares 8 327 – (1 136) 57 (3) 265 – 7 510 Preference shares 5 791 (118) (318) 1 169 (579) – – 5 945 Investments in subsidiaries 9 309 213 (954) 3 786 (903) – – 11 451 Investments in associates 11 131 (76) 2 479 1 126 (221) (265) – 14 174 34 558 19 71 6 138 (1 706) – – 39 080
VALUATION PROCESSES APPLIED BY THE GROUP The Group’s main instruments for monitoring the performance of its investee companies are through quarterly IMC meetings, including but not limited to the PACS (payment and collection system) and regular client review visits, as well as by way of analysis of management accounts and audited financial statements. The Post-Investment Monitoring Department (PIMD) creates a focused approach to the monitoring of IDC investments. One of the key monitoring activities is the IMC Equity meetings, wherein the calculations of fair values and impairments are assessed and approved by the committee. The IMC equity meetings are normally held three times per financial year, in April, August and December for reporting periods of February, June and September respectively.
VALUATION TECHNIQUES USING OBSERVABLE INPUTS The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:
Level 1 Instruments valued with reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available and the price represents actual and regularly occurring market transactions on an arm’s length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. These include listed shares.
2016 Integrated Report 119 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
4. FAIR VALUE INFORMATION (continued) VALUATION TECHNIQUES USING OBSERVABLE INPUTS (continued) Level 2 Instruments valued using inputs other than quoted prices as described above for Level 1 but which are observable for the instrument, either directly or indirectly, such as: • Quoted price for similar assets or liabilities in an active market; • Quoted price for identical or similar assets or liabilities in inactive markets; • Valuation model using observable inputs; and • Valuation model using inputs derived from/corroborated by observable market data. These include derivative financial instruments, investment properties and option pricing models.
VALUATION TECHNIQUES USING UNOBSERVABLE INPUTS Level 3 Instruments valued using inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Valuation techniques include price earnings, net present value and discounted cash flow models, comparison with similar instruments for which market observable prices exist, and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates and discount rates. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
PRICE EARNINGS (PE) VALUATION The PE valuation method is the first valuation option, but has only been used in respect of companies with: • At least two years’ profit history; • Forecast budgeted steady growth in profits; • Low risk; • Good year-on-year performance; and • A long history of consistent return – operating in an industry that is not prone to fluctuations. FREE CASH FLOW (FCF) VALUATION FCF is the most widely used valuation method by the Group on its level 3 financial instruments. The below approach is followed: • All inputs are substantiated, especially in instances where there are prior year losses; and • This method is used without exception for valuing all projects and start-ups unless the going concern principle is in doubt. In the case where a project has a limited remaining life (e.g. mining operations or single contract with a determined end), a separate “limited life” FCF model is used.
NET ASSET VALUE (NAV) VALUATION Forced-sale basis The Group uses the Forced-Sale NAV method in the following circumstances: • Where the going concern assumption is not applicable; or • Where it has been motivated that no other model is appropriate.
NAV – going concern The Group uses NAV (without applying forced sale) where it can be motivated that no other model is appropriate based on the following conditions: • An entity is consistently making losses and not meeting budgets (excluding start-up operations); • An entity has material variances between actual and budgeted figures; • An entity operates in a highly volatile sector making it almost impossible to budget; • An entity has completed all studies necessary to implement a project but has however not yet secured the necessary capital to fully fund the implementation of the project; and • An entity is not fully funded and there is no clear indication that it will obtain the necessary funding to complete the project/ expansion/continue operations.
120 Industrial Development Corporation of South Africa Limited QUANTITATIVE INFORMATION ABOUT FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Description Valuation techniques Unobservable input Range Equity instruments All sectors Risk-free rate 7.63% Expected long-term growth 5.00% Agro-processing Discounted cash flow Cost of debt 5.1% – 10.9% Discount factor 9.7% – 22.4% Sector beta 1.00 Price-earning valuation Industry/sector PE ratio 16.5% – 21.6% Risk adjusted PE ratio 9.9% – 13.1% Expected long-term growth 5% Basic Metals and Mining Discounted cash flow Cost of debt 3.5% – 11.7% Discount factor 6.8% – 19.5% Sector beta 1.00 Basic and Speciality Chemicals Discounted cash flow Cost of debt 4.0% – 10.8% Discount factor 4.9% – 14.0% Sector beta 1.00 Automotive Discounted cash flow Cost of debt discount factor sector beta 7.3% – 13.9% 12.9% – 16.2% 1.00 Light Manufacturing and Tourism Discounted cash flow Cost of debt 9.5% – 11.5% Discount factor 7.9% – 15.5% Sector beta 1.00 Heavy Manufacturing Discounted cash flow Cost of debt 3.8% – 9.5% Discount factor 13.7% – 20.2% Sector beta 1.00 – 1.01 Chemical Products Discounted cash flow Cost of debt 7.9% – 12.5% Discount factor 14.1% – 17.4% Sector beta 1.00 New Industries Discounted cash flow Cost of debt 7.5% – 14.4% Discount factor 5.7% – 21.0% Sector beta 1.00 Biological assets Pecan nut trees Discounted cash flow Pecan nut yield – tonnes per hectare 2 375 tonnes per hectare when mature in eight years Pecan nut price R46 per kg in shell Discount rate 15% Risk of damage due to forces of nature 10% Walnut trees Discounted cash flow Inflation 5% Discount rate 15% Walnut nut price Prevailing market price
DISCOUNTED CASH FLOW Significant increases in any of the inputs in isolation would result in lower fair values. Significant decreases in any of the inputs in isolation would result in higher fair values.
PRICE-EARNING VALUATION The fair value would increase (decrease) if: • The risk-adjusted PE ratio were higher/(lower) or • The expected long-term growth were higher/(lower)
2016 Integrated Report 121 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
Group Company Figures in Rand million 2016 2015 2016 2015 5. CASH AND CASH EQUIVALENTS Cash and balances with bank 2 520 1 519 1 840 987 Negotiable securities 4 345 6 738 4 343 6 727 Bank overdraft (38) (44) – – 6 827 8 213 6 183 7 714 Current assets 6 865 8 257 6 183 7 714 Current liabilities (38) (44) – – 6 827 8 213 6 183 7 714 Cash and cash equivalents comprise cash deposits with banks and negotiable securities maturing within three months. These attract interest at market-related rates. 6. TRADE AND OTHER RECEIVABLES Trade receivables 3 003 2 869 906 1 065 Prepayments 54 602 – – Other receivable 248 231 8 4 3 305 3 702 914 1 069
TRADE AND OTHER RECEIVABLES PLEDGED AS SECURITY A subsidiary, Prilla (Pty) Ltd, entered into an invoice discounting agreement with Nedbank Limited whereby it has discounted all its debtors and has given first cession of all receivables as security for a R78 million (2015: R95 million) finance facility advanced to it. A subsidiary, Sheraton Textiles, has ceded its trade and other receivables to the value of R30 million (2015: R35 million, to The Standard Bank of South Africa as security for its overdraft facilities. Group Company Figures in Rand million 2016 2015 2016 2015 7. INVENTORIES Finished goods 1 191 1 136 – – Raw materials, components 1 119 1 064 – – Phosphate rock 658 973 – – Consumable stores 431 421 4 4 Work in progress 200 259 – – 3 599 3 853 4 4
Group inventory to the value of R79 million was written down as a net realisable value adjustment at 31 March 2016 (2015: R40 million).
122 Industrial Development Corporation of South Africa Limited Group Company Figures in Rand million 2016 2015 2016 2015 8. LOANS AND ADVANCES Loans and advances to clients* 29 544 26 559 28 489 25 580 Specific impairment of loans and advances (5 058) (3 729) (4 490) (3 412) Portfolio impairment of loans and advances (558) (418) (548) (408) 23 928 22 412 23 451 21 760
* Interest rates range between 3% and 18.1% Reconciliation of impairment of loans and advances Specific allowances for impairment Balance at 1 April 3 729 3 472 3 412 3 311 Impairment loss for the year – Charge for the year 2 160 974 2 227 1 402 – Recoveries (48) (18) (48) (18) – Effect of foreign currency movements 188 3 188 3 Write-offs (971) (702) (1 289) (1 286) Balance at 31 March 5 058 3 729 4 490 3 412 Portfolio allowance for impairment Balance at 1 April 418 377 408 377 Impairment charge for the year 140 41 140 31 Balance at 31 March 558 418 548 408 Total allowances for impairment 5 616 4 147 5 038 3 820 Maturity of loans and advances – due within three months 378 1 104 378 1 104 – due after three months but within one year 4 294 4 198 3 841 3 656 – due after one year but within two years 4 145 4 523 3 842 4 348 – due after two years but within three years 4 502 3 857 4 287 3 722 – due after three years but within four years 3 208 3 630 3 085 3 497 – due after four years but within five years 2 546 2 331 2 511 2 278 – due after five years 10 471 6 916 10 545 6 975 – impairment of loans and advances (5 616) (4 147) (5 038) (3 820) 23 928 22 412 23 451 21 760
9. INVESTMENTS Listed equities 39 070 43 751 15 551 21 796 Unlisted equities 7 040 7 924 6 409 7 687 Preference shares 9 120 7 843 9 120 7 843 Preference shares – option values 91 140 91 140 55 321 59 658 31 171 37 466 Impairment of listed shares (324) (232) (324) (232) Impairment of unlisted shares (6) (177) (6) (177) Impairment of preference shares (1 719) (1 898) (1 719) (1 898) Shares at fair value 53 272 57 351 29 122 35 159 Specific allowance for impairment Listed equities Balance at 1 April 232 124 232 124 Impairment charge/(reversal) for the year 92 108 92 108 324 232 324 232 Unlisted equities Balance at 1 April 177 152 177 152 Impairment (reversal)/charge for the year (171) 25 (171) 25 6 177 6 177 Preference shares Balance at 1 April 1 898 1 780 1 898 1 780 Impairment (reversal)/charge for the year (179) 118 (179) 118 1 719 1 898 1 719 1 898 Comprising: Impairment of listed shares 324 232 324 232 Impairment of unlisted shares 6 177 6 177 Impairment of preference shares 1 719 1 898 1 719 1 898 2 049 2 307 2 049 2 307
2016 Integrated Report 123 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
Group Company Figures in Rand million 2016 2015 2016 2015 10. NON-CURRENT ASSETS HELD-FOR-SALE Assets and liabilities Non-current assets held-for-sale Property, plant and equipment 104 47 – – Investment property 14 18 – – 118 65 – – On 20 November 2013, the Board of directors of sefa approved the sale of certain properties in the property portfolio. Investment properties held-for-sale are current assets. Purchase offers for six of the 16 properties reclassified for sale have been concluded and are awaiting registration at the relevant deeds office. The remaining 10 properties are in the process of negotiations for sale. During the current period, management of Scaw SA (Pty) Ltd committed to a plan to sell the Scawlands property located in Germiston and the DRI plant located at the Union Junction facility in Germiston. Accordingly, the fair value of the land and buildings for Scawlands (R38 million) and the carrying amount of plant and equipment for the DRI (R66.1 million) has been accounted for as assets held-for-sale at 31 March 2016.
Company Figures in Rand million 2016 2015 11. INVESTMENTS IN SUBSIDIARIES Fair value of investments 41 364 36 948 Impairment of shares (704) (107) Loans receivable 7 020 7 834 Impairment of loans (793) (1 260) 46 887 43 415
IDC net indebtedness IDC net indebtedness Share % Shares at cost and to the holding by the holding IDC subsidiaries class interest fair value Company Company Figures in Rand million 2016 2015 2016 2015 2016 2015 Arengo 316 Ordinary 100 – – 159 151 – – ADC Cables Ordinary 62 35 – 257 – – – Dymson Nominee Ordinary 100 2 2 45 44 – – Findevco Ordinary 100 – – – – (373) (373) Foskor* Ordinary 59 8 8 700 1 840 – – Foskor* Preference 2 177 – – – – – Herdmans SA Ordinary 100 – – 9 272 – – Impofin Ordinary 100 – – – – (88) (88) Kindoc Investments Ordinary 100 – – 154 154 – – Kindoc Sandton Properties Ordinary 100 – – 194 200 – – Konbel Ordinary 100 – – – – (10) (10) Konoil Ordinary 100 – – – – (10 995) (10 009) Prilla Ordinary 100 14 14 356 373 – – Scaw South Africa Ordinary 74 – – 3 303 2 907 – – Scaw South Africa Preference 1 655 1 474 – – – – Scaw Metals Ordinary 100 45 45 – – – – Sustainable Fibre Solutions Ordinary 100 4 4 128 125 – – South African Fibre Yarn Ordinary 69 – 15 – 49 – – Rugs Sheraton Textiles Ordinary 80 – – 62 50 – – Thelo Rolling Stock Leasing Ordinary 50 – – 1 390 1 147 – – Other Ordinary 142 151 263 522 – – 4 082 1 713 7 020 7 834 (11 466) (10 480) Fair value adjustment 37 282 35 235 – – – – Impairment adjustment (704) (107) (793) (1 260) – – Fair value 40 660 36 841 6 227 6 574 (11 466) (10 480)
* Legally the IDC owns 59% of Foskor, but for accounting purposes an effective 85% of Foskor is consolidated.
124 Industrial Development Corporation of South Africa Limited PROFIT AND LOSSES The aggregate net profit and losses after taxation of subsidiaries attributable to the IDC were as follows:
Group Company Figures in Rand million 2016 2015 2016 2015 Profits 1 130 1 211 Losses (2 353) (1 701) (1 223) (490) Included in financing are the following investments which have been made in terms of section 3(a) of the Industrial Development Act with the approval of the President: Foskor Limited – at cost – – 8 8 Sasol Limited – at cost 131 131 – – 131 131 8 8
A register of investments is available and is open for inspection at the IDC’s registered office.
COMPANIES IN WHICH THE IDC TOOK A MAJORITY SHAREHOLDING WITH EXPOSURES LESS THAN R250 MILLION FROM 1 APRIL 2015 TO 31 MARCH 2016 Disclosure in terms of notice 450 published in the Government Gazette of 28 June 2013.
IDC Company name shareholding (%) AzarGen Biotechnologies (Pty) Ltd 66 Diacoustic Medica Devices (Pty) Ltd 80 Mimotech (Pty) Ltd 55 Quorus Biotech (Pty) Ltd 61
SUBSIDIARIES WITH MATERIAL NON-CONTROLLING INTERESTS The following information is provided for subsidiaries with non-controlling interests which are material to the reporting company. The summarised financial information is provided prior to inter-company eliminations.
% ownership/interest Country of held by non- incorporation controlling interest Subsidiary 2016 2015 Foskor RSA 15 15 Scaw RSA 26 26
The percentage ownership interest and the percentage voting rights of the non-controlling interests were the same in all cases except for Foskor Limited where the voting rights were 41% (2015: 41%)
SUMMARISED STATEMENT OF FINANCIAL POSITION Foskor Scaw 2016 2015 2016 2015 Assets Non-current assets 5 572 5 100 2 546 2 658 Current assets 3 231 2 800 2 065 2 562 Total assets 8 803 7 900 4 611 5 220 Liabilities Non-current liabilities 1 832 2 544 6 815 7 291 Current liabilities 1 908 2 092 2 057 1 271 Total liabilities 3 740 4 636 8 872 8 562 Total net assets/(liabilities) 5 063 3 264 (4 261) (3 342) Carrying amount of non-controlling interest 760 490 (1 108) (869)
2016 Integrated Report 125 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
11. INVESTMENTS IN SUBSIDIARIES (continued) SUMMARISED STATEMENT OF COMPREHENSIVE INCOME Foskor Scaw Figures in Rand million 2016 2015 2016 2015 Revenue 6 042 5 297 5 661 6 269 Other income and expenses (6 754) (5 895) (6 735) (7 193) Profit/(loss)before tax (712) (598) (1 074) (924) Tax expense 144 188 – (161) Profit/(loss) (568) (410) (1 074) (1 085) Other comprehensive income/(loss) – (121) 78 574 Total comprehensive income (568) (531) (996) (511) Profit/(loss) allocated to non-controlling interest (85) (62) (279) (282) Other comprehensive income allocated to non-controlling interest – (18) 20 149
SUMMARISED STATEMENT OF CASH FLOWS Foskor Scaw Figures in Rand million 2016 2015 2016 2015 Cash flows from operating activities (310) 117 (55) (51) Cash flows from investing activities (405) (534) (52) (284) Cash flows from financing activities 745 63 296 272 Net increase/(decrease) in cash and cash equivalents 30 (354) 189 (63)
12. INVESTMENTS IN ASSOCIATES, JOINT VENTURES AND PARTNERSHIPS Group Company Figures in Rand million 2016 2015 2016 2015 Associated companies 18 102 15 560 15 411 15 594 Fair value of investments – listed shares in associates – – 1 211 1 450 Fair value of investments – unlisted shares in associates – – 10 187 11 126 Impairment of shares – – (1 593) (1 321) Net asset value at acquisition 2 805 2 175 – – Accumulated equity-accounted income 17 929 16 886 – – Accumulated equity-accounted losses and impairments (8 725) (8 235) – – Loans receivable 7 230 5 705 7 201 5 748 Impairment of loans (1 137) (971) (1 595) (1 409) Partnerships and joint ventures 212 203 10 30 Partners’ capital 221 223 52 60 Accumulated losses (9) (20) (42) (30) 18 314 15 763 15 421 15 624
126 Industrial Development Corporation of South Africa Limited Material associates
Total Total exposure exposure Accounting Country of % 2016 2015 Companies periods* incorporation holding R'm R'm Broadband Infraco Provides telecommunication infrastructure RSA 26.00 124 124 Broodkraal Landgoed Farms table grapes 1/7/14 – 30/6/15 RSA 32.00 77 80 Ethekwini Health and Heart Centre Operates a hospital 1/3/15 – 29/2/16 RSA 25.48 125 149 Columbus Stainless Steel Steel manufacturer RSA 24.00 710 654 Savannah Consortium Mining and processing platinum metals RSA 29.70 69 88 Duferco Steel Processing Processes steel coil RSA 50.00 – 14 Eastern Produce Malawi Farms, tea coffee and macadamia nuts Malawi 26.80 167 175 Hans Merensky Holds investments in timber and agricultural industries 1/1/15 – 31/12/15 RSA 29.70 825 601 Hernic Ferrochrome Operates a ferrochrome plant RSA – – 222 Hulamin Limited Asset-leasing company 1/1/15 – 31/12/15 RSA 29.90 1 153 1 146 Incwala Resources Platinum mining RSA 23.60 641 641 Karsten Boerdery Farms table grapes and dates 1/10/14 – 30/9/15 RSA 37.32 340 303 KaXu Solar One Power plant 1/1/15 – 31/12/15 RSA 20.00 1 748 1 803 KHI Solar One (Pty) Ltd Concentrating solar tower power plant 1/1/15 – 31/12/15 RSA 20.00 700 – Merafe Ltd Operates chrome and alloys plant 1/1/15 – 31/12/15 RSA 21.90 761 684 Mozal S.A.R.L. Produces primary aluminium metal 1/7/14 – 30/6/15 Mozambique 24.04 4 290 3 777 Palabora Copper Mining of various minerals 1/1/15 – 31/12/15 RSA 20.00 1 323 1 245 Sheba’s Ridge Platinum Produce base metals and platinum group metals RSA 26.00 – 16 Umicore Catalyst Manufactures automotive catalysts 1/1/15 – 31/12/15 RSA 35.00 201 214 York Timber Ltd Sawmilling 1/1/15 – 31/12/15 RSA 28.70 704 688 Other associates Various 4 144 2 936 18 102 15 560
* The accounting periods for which the financial statements of the associated entities have been prepared, where they are different from that of the investor, are disclosed above.
The investment in Hernic Ferrochrome was diluted to 15.7% during the year 2016.
Company Figures in Rand million 2016 2015 Fair value Opening fair value of shares 11 255 9 061 Movement in fair values during the year: Chuma/Malibongwe/Savannah Platinum SPV (Pty) Ltd 2 (10) Hans Merensky Holdings (Pty) Ltd 72 26 Hernic Ferrochrome (Pty) Ltd (142) 32 Hulett Aluminium (Pty) Ltd (222) 170 Incwala Resources (Pty) Ltd (186) (196) Merafe Limited (16) (153) Mozal S.A.R.L. (1 228) 1 042 York Timber Ltd – (157) Rio Tinto South Africa (462) 979 Imbani Platinum – 2 Other 732 459 9 805 11 255
2016 Integrated Report 127 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
12. INVESTMENTS IN ASSOCIATES, JOINT VENTURES AND PARTNERSHIPS (continued) SUMMARISED STATEMENT OF COMPREHENSIVE INCOME Other Total Dividend compre- compre- received Profit/ hensive hensive from Figures in Rand million Revenue (loss) income income associate 2016 Broadband Infraco 542 123 – 123 – Columbus Steel 13 086 (417) 2 (415) – Duferco Steel Processing 3 712 (223) 62 (161) – Eastern Produce Malawi 400 60 – 60 10 Hans Merensky 6 672 726 399 1 125 6 Hulamin Ltd 8 395 86 (78) 8 8 Karsten Boerdery 849 132 – 132 8 KaXu Solar One 614 (271) – (271) 12 KHI Solar One 5 2 10 12 6 Merafe Ltd 4 428 343 – 343 5 Mozal S.A.R.L. 7 824 (547) – (547) 15 Palabora Copper 7 664 231 – 231 – Umicore Catalyst 2 601 115 – 115 53 Xina Solar One 2 (2) 523 521 – York Timber Ltd 874 35 – 35 –
SUMMARISED STATEMENT OF FINANCIAL POSITION Non- Non- current Current current Current Total net Figures in Rand million assets assets liabilities liabilities assets 2016 Broadband Infraco 1 367 190 503 213 841 Columbus Steel 2 202 3 991 355 2 726 3 112 Duferco Steel Processing 1 471 946 1 025 1 657 (265) Eastern Produce Malawi 921 244 292 167 706 Hans Merensky 2 985 2 178 827 1 229 3 107 Hulamin Ltd 3 396 3 260 931 1 871 3 854 Karsten Boerdery 1 590 994 1 019 502 1 063 KaXu Solar One 7 215 501 6 944 185 587 KHI Solar One 3 914 247 3 364 93 704 Merafe Ltd 3 258 2 099 1 379 564 3 414 Mozal S.A.R.L. 13 303 4 264 1 554 1 427 14 586 Palabora Copper 4 313 4 420 1 337 779 6 617 Umicore Catalyst 128 898 32 418 576 Xina Solar One 5 704 677 4 313 25 2 043 York Timber Ltd 3 301 852 1 431 272 2 450
SUMMARISED STATEMENT OF COMPREHENSIVE Other Total Dividend compre- compre- received Profit/ hensive hensive from Figures in Rand million Revenue (loss) income income associate 2015 Broadband Infraco 364 (268) – (268) – Ethekwini Health and Heart Centre 364 79 – 79 – Savannah Consortium* 2 511 (772) – (772) – Duferco Steel Processing 1 065 (56) – (56) – Eastern Produce Malawi 390 54 – 54 12 Hans Merensky 5 587 306 – 306 6 Hernic Ferrochrome 2 995 (529) 43 (486) – Hulamin Ltd 8 039 385 28 413 24 Incwala Resources 1 (2) – (2) – Karsten Boerdery 731 163 – 163 4 KaXu Solar One – (4) (170) (174) – Merafe Ltd 3 609 214 (5) 209 10 Mozal S.A.R.L. 9 400 631 – 631 – Palabora Copper 11 295 1 022 65 1 087 190 Umicore Catalyst 2 403 163 – 163 90 York Timber Ltd 1 415 108 (1) 107 –
* Financial information is for the underlying investment being Aquarius Platinum Limited.
128 Industrial Development Corporation of South Africa Limited SUMMARISED STATEMENT OF FINANCIAL POSITION
Non- Non- current Current current Current Total net Figures in Rand million assets assets liabilities liabilities assets 2015 Broadband Infraco 1 318 413 2 378 242 (889) Ethekwini Health and Heart Centre 435 142 297 58 222 Savannah Consortium* 5 216 2 452 975 1 908 4 785 Duferco Steel Processing 1 208 1 157 985 1 332 48 Eastern Produce Malawi 928 190 263 203 652 Hans Merensky 2 506 1 453 711 828 2 420 Hernic Ferrochrome 1 998 2 131 728 3 480 (79) Hulamin Limited 2 921 3 348 714 1 721 3 834 Incwala Resources 2 796 23 – 100 2 719 Karsten Boerdery 1 366 624 815 205 970 KaXu Solar One 7 036 201 6 203 212 822 Merafe Ltd 3 253 2 148 1 366 911 3 124 Mozal S.A.R.L. 13 938 4 361 1 821 1 533 14 945 Palabora Copper 3 084 5 565 1 513 910 6 226 Umicore Catalyst 129 830 28 320 611 York Timber Ltd 2 957 870 1 175 255 2 397
* Financial information is for the underlying investment being Aquarius Platinum Limited.
Group Figures in Rand million 2016 2015 The aggregate amounts were as follows: Non-current assets 71 688 82 966 Current assets 28 355 41 056 100 043 124 022 Equity 40 295 62 220 Non-current liabilities 39 145 38 795 Current liabilities 20 603 23 008 100 043 124 023 Statement of comprehensive income Revenue 62 893 56 000 Profits 1 887 1 761 Losses (1 794) (4 577)
PARTNERSHIPS AND JOINT VENTURES
Total Total % exposure exposure Figures in Rand million interest 2016 2015 Women Private Equity Fund (One) 38.83 – 10 The Vantage Capital Fund Trust 100 10 20 10 30 Profit 10 3 The aggregate amounts were as follows: Non-current assets 169 148 98 77 Current assets 256 256 – – 425 404 98 77 Equity 425 404 98 77 Statement of comprehensive income Profit (3) 3 (3) 3 Losses 25 (25) – –
2016 Integrated Report 129 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
Group Company Figures in Rand million 2016 2015 2016 2015 13. DEFERRED TAXATION Composition of deferred taxation asset is as follows: Capital and other losses 41 12 – – Calculated tax losses 174 49 – – 215 61 – – Balance at the beginning of the year 61 389 – – Calculated tax losses 174 (153) – – Temporary differences (20) (175) – – – Other (20) (175) – – Balance at the end of the year 215 61 – – Composition of deferred taxation liability is as follows: Capital and other allowances (79) 434 (827) (662) Capital gains and losses and fair value adjustments 4 532 3 531 5 005 5 781 Reduced by taxation on: 4 453 3 965 4 178 5 119 Calculated taxation losses (1 115) (596) – – 3 338 3 369 4 178 5 119 At the beginning of the year 3 369 5 480 5 119 7 261 Calculated taxation losses (518) (170) – – Temporary differences 487 (1 941) (941) (2 142) – Property, plant and equipment (31) (14) (34) 7 – Provisions (505) (49) (116) 8 – Mining assets – 54 – – – Capital gains and losses and fair value adjustments 1 023 (1 932) (791) (2 157) Balance at the end of the year 3 338 3 369 4 178 5 119
14. INVESTMENT PROPERTY Figures in Rand million 2016 2015 2016 2015 Group Cost Fair value Cost Fair value Land and buildings leased to industrialists 18 18 31 31 Land held for development 324 324 249 249 Farming land and buildings 20 20 19 19 Total 362 362 299 299 Company Land and buildings leased to industrialists 15 15 15 15
RECONCILIATION OF INVESTMENT PROPERTY Opening Fair value Figures in Rand million balance adjustments Total Group – 2016 Land and buildings leased to industrialists 31 (13) 18 Farming land and buildings 19 1 20 Land held for development 249 75 324 299 63 362
Opening Classified as Fair value Figures in Rand million balance Additions held-for-sale Transfers adjustments Total Group – 2015 Land and buildings leased to industrialists 20 – – 11 – 31 Land held for development 268 3 (18) (2) (2) 249 Farming land and buildings 19 – – – – 19 307 (18) 9 (2) 299
130 Industrial Development Corporation of South Africa Limited 14. INVESTMENT PROPERTY (continued) RECONCILIATION OF INVESTMENT PROPERTY Opening Figures in Rand million balance Total Company – 2016 Land and buildings leased to industrialists 15 15 Company – 2015 Land and buildings leased to industrialists 15 15
15. PROPERTY, PLANT AND EQUIPMENT 2016 2015 Accumulated Accumulated depreciation depreciation Cost/ and Carrying Cost/ and Carrying Figures in Rand million valuation impairment value valuation impairment value Group Land and buildings 3 773 (632) 3 141 3 761 (569) 3 192 Plant and machinery 11 238 (4 868) 6 370 9 041 (4 248) 4 793 Aircraft 186 (63) 123 182 (64) 118 Furniture and fixtures 197 (164) 33 179 (148) 31 Motor vehicles 88 (36) 52 80 (30) 50 Assets under construction 1 084 – 1 084 1 733 – 1 733 Capitalised borrowing costs 10 – 10 4 – 4 Total 16 576 (5 760) 10 816 14 980 (5 059) 9 921
Company Plant and machinery 111 (105) 6 103 (103) – Aircraft 186 (63) 123 182 (64) 118 Furniture and fixtures 77 (59) 18 57 (47) 10 Motor vehicles 6 (5) 1 6 (5) 1 Assets under construction 18 – 18 – – – Total 398 (232) 166 348 (219) 129
RECONCILIATION OF PROPERTY, PLANT AND EQUIPMENT Additions Figures in through Foreign Rand Opening business exchange Impairment Carrying million balance Additions combinations Disposals Transfers Revaluations movements Depreciation loss value Group – 2016 Land and buildings 3 192 125 12 (17) (130) 39 1 (81) – 3 141 Plant and machinery 4 793 2 264 162 (134) 81 – 2 (598) (200) 6 370 Aircraft 118 – – – – 13 – (5) – 126 Furniture and fixtures 31 27 1 (1) – 2 – (27) – 33 Motor vehicles 50 10 5 (1) – – – (12) – 52 Asset under construction 1 733 96 2 (164) (583) – – – – 1 084 Capitalised borrowing costs 4 – 6 – – – – – – 10 9 921 2 522 188 (317) (632) 54 3 (723) (200) 10 816
2016 Integrated Report 131 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
15. PROPERTY, PLANT AND EQUIPMENT (continued) RECONCILIATION OF PROPERTY, PLANT AND EQUIPMENT (continued) Additions Figures in through Foreign Rand Opening business exchange Impairment Carrying million balance Additions combinations Disposals Transfers Revaluations movements Depreciation loss value Group – 2015 Land and buildings 2 520 89 (139) 18 763 (1) (41) (17) 3 192 Plant and machinery 4 651 714 (126) 66 – 13 (512) (13) 4 793 Aircraft 153 – – (47) 17 – (5) – 118 Furniture and fixtures 66 23 (23) – – – (35) – 31 Motor vehicles 34 21 – – – – (5) – 50 Assets under construction 1 588 333 (84) (81) – (9) – (14) 1 733 Capitalised borrowing costs – – – 4 – – – – 4 9 012 1 180 (372) (40) 780 3 (598) (44) 9 921
RECONCILIATION OF PROPERTY, PLANT AND EQUIPMENT Opening Carrying Figures in Rand million balance Additions Disposals Revaluations Depreciation value Company – 2016 Plant and machinery – 8 – – (2) 6 Aircraft 118 – – 12 (7) 123 Furniture and fixtures 10 20 – – (12) 18 Motor vehicles 1 – – – – 1 Assets under construction – 18 – – – 18 129 46 – 12 (21) 166 Company – 2015 Plant and machinery 2 – – – (2) – Aircraft 106 – – 17 (5) 118 Furniture and fixtures 11 14 (4) – (11) 10 Motor vehicles 1 – – – – 1 120 14 (4) 17 (18) 129
A register containing the information required by Regulation 25(3) of the Companies Regulations, 2011 is available for inspection at the registered office of the Company. Figures in Rand million 31 March 2016 31 March 2015 Cost-capitalised finance lease 41 69 Accumulated depreciation (24) (22) Carrying amount 17 47
Registers containing details of land and buildings, including details of any revaluations and encumbrances, are kept at the registered offices of the companies concerned.
132 Industrial Development Corporation of South Africa Limited 16. BIOLOGICAL ASSETS
2016 2015 Fair value Fair value Group Cost adjustments Fair value Cost adjustments Fair value Maize* 16 – 16 13 – 13 Planted walnut trees** 136 – 136 187 – 187 Planted pecan nut trees*** 54 – 54 39 – 39 Blueberry plants**** 9 – 9 8 – 8 Total 215 – 215 247 – 247
RECONCILIATION OF BIOLOGICAL ASSETS Gains or losses arising from Opening changes in Figures in Rand million balance Additions Disposals fair value Total Group – 2016 Maize 13 13 (13) 3 16 Planted walnut trees 187 3 (1) (53) 136 Planted pecan nut trees 39 15 – – 54 Blueberry plants 8 2 (1) – 9 247 33 (15) (50) 215 Group – 2015 Maize 9 10 (9) 3 13 Planted walnut trees 4 – – 183 187 Planted pecan nut trees 25 14 – – 39 Blueberry plants 5 3 – – 8 43 27 (9) 186 247
* Current biological assets comprise maize which will be sold within the next 12 months. Due to the fact that there is an active market at year end and the fair value of the maize could be determined by using an external independent valuer the biological asset would be measured at fair value less estimated point-of- sale cost of agricultural produce, which is determined at the point-of-sale harvest. ** Biological assets comprise planted walnut trees and because there is no other commercial crop grown in South Africa or anywhere in the world with the same climate conditions or even the same tree cultivars, it is not possible to benchmark this project on the basis of a similar project elsewhere in the world. This is a green field project with high levels of uncertainty/risk. Although the revised project cash flow model is the best estimate available at this time, it has a high degree of risk and past reviews indicate that the cash flows could vary significantly over time. Therefore, biological assets are carried at cost less accumulated depreciation and impairment losses. *** The fair value of the pecan nut trees has been determined by management which is of the opinion that the fair value is similar to the historical cost due to the reasons that the trees are under two years old, still need to be fully established and will reach maturity within the next six to eight years. There is still a high risk of disease, death or damage due to forces of nature or other circumstances up to that point. Sufficient measures are in place to minimise this risk. The fair value of the pecan nuts, although based on historical cost, compares to a cash flow based valuation at 16% discounted rate. This is deemed fair by management based on the risk factors indicated above. **** There are 119.05 hectares (2015: 99.77 hectares) of plants. The current density for the majority of the plants is 4 000 and 5 000 plants per hectare, but new plant densities at Klyne Fontein are 4 167 and 3 333 plants per hectare respectively. Fair value cannot be determined for blueberry plants as trustworthy information about the projected yields for blueberry plants is not available and any predictions about yields cannot be verified in terms of historical yields.
2016 Integrated Report 133 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
17. INTANGIBLE ASSETS 2016 2015 Cost/ Accumulated Carrying Cost/ Accumulated Carrying Figures in Rand million valuation amortisation value valuation amortisation value Group Goodwill 881 (881) – 882 (867) 15 Computer software, other 127 (64) 63 124 (49) 75 Customer relationships 93 (93) – 93 (93) – Intellectual property 2 (2) – 2 (2) – Total 1 103 (1 040) 63 1 101 (1 011) 90
RECONCILIATION OF INTANGIBLE ASSETS Opening Impairment/ Figures in Rand million balance Additions amortisation Total Group – 2016 Goodwill 15 – (15) – Computer software, other 75 2 (12) 63 90 2 (29) 63 Group – 2015 Goodwill 15 – – 15 Computer software, other 24 58 (7) 75 39 58 (7) 90
18. SHARE CAPITAL Group Company Figures in Rand million 2016 2015 2016 2015 Authorised A shares of R1 each – 1 000 000 1 1 1 1 B shares of R1 each – 1 499 000 000 1 499 1 499 1 499 1 499 1 500 1 500 1 500 1 500 Issued Ordinary Type A 1 1 1 1 Ordinary Type B 1 392 1 392 1 392 1 392 1 393 1 393 1 393 1 393
A shares are not transferable other than by an Act of Parliament, however, the B shares may be sold with the authorisation of the President of the Republic of South Africa. The A shares held by the State shall entitle it to a majority vote.
19. DERIVATIVE FINANCIAL INSTRUMENTS Group Company Figures in Rand million 2016 2015 2016 2015 Derivative assets Foreign exchange contract assets 69 4 62 – Derivative liabilities Foreign exchange contract liability 59 56 44 50 These derivative assets and liabilities are subject to master netting agreements, which allow the Company to off-set the assets and liabilities, arriving at a net asset position of R18 million (2015: net liability position of R50 million). All contractual maturities for the derivative assets and liabilities are within 12 months.
134 Industrial Development Corporation of South Africa Limited 20. TRADE AND OTHER PAYABLES Group Company Figures in Rand million 2016 2015 2016 2015 Trade payables 3 332 3 354 617 953 Accrued bonus 282 277 250 236 Accrued leave pay 111 117 78 73 3 725 3 748 945 1 262 MOVEMENT IN ACCRUALS Bonuses Balance at the beginning of the year 277 259 236 199 Additional accruals raised during the year 229 274 193 211 Utilised during the year (224) (256) (179) (174) Balance at the end of the year 282 277 250 236 Leave pay Balance at the beginning of the year 117 115 73 71 Additional accruals raised during the year 36 25 24 22 Utilised during the year (42) (23) (19) (20) Balance at the end of the year 111 117 78 73
21. RETIREMENT BENEFITS PENSION AND PROVIDENT SCHEMES The Group has pension and provident schemes covering substantially all employees. All eligible employees are members of either defined contribution or defined benefit schemes. These schemes are governed by the Pension Funds Act, 1956, as amended. The assets of the schemes under the control of trustees are held separately from those of the Group. The costs charged to profit or loss represent contributions payable to the scheme by the Group at rates specified in the rules of the scheme.
DEFINED CONTRIBUTION SCHEMES Employees and Group companies contribute to the provident funds on a fixed-contribution basis. No actuarial valuation of these funds is required. Contributions, including past-service costs, are charged to profit or loss when incurred.
DEFINED BENEFIT SCHEME A Group company and its employees contribute to a defined benefit pension fund. The pension fund is final salary fully funded. The assets of the fund are held in an independent trustee-administered fund, administered in terms of the Pension Funds Act, 1956, as amended. Group Figures in Rand million 2016 2015 The fund is valued every three years using the projected unit credit method. The actuarial valuation for purposes of IAS 19 was performed on 31 December 2015. The amounts recognised in the statement of financial position are as follows: Present value of funded obligations 364 330 Fair value of plan assets (403) (405) Other 39 75 Liability recognised – – The movement in the defined benefit obligation Opening balance 330 380 Current-service cost 2 1 Interest-cost 26 28 Actuarial (gains)/losses 46 1 Benefit paid (40) (29) Decrease as a result of transfer to previous shareholder* – (51) Closing balance 364 330 Movement in asset plan Fair value of plan assets at the beginning of the year 404 449 Disposal of subsidiary – (50) Expected return on asset 31 34 Actuarial (loss)/gain recognised during the year 7 – Benefits paid (39) (29) Fair value of plan assets at the end of the year 403 404
* The transfer to previous shareholder relates to Scaw
2016 Integrated Report 135 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
21. RETIREMENT BENEFITS (continued) DEFINED BENEFIT SCHEME (continued) Group Figures in Rand million 2016 2015 The amounts recognised in profit or loss are as follows: Current-service cost 2 1 Interest cost 26 28 Expected return on assets (31) (34) Net actuarial loss recognised during the year 53 1 Total included in operating expenses 50 (4) The amounts recognised in other comprehensive income in 2016 are income of R1.1 million. The actual return on plan assets was: Expected return on plan assets 31 34 Actuarial gains/(losses) on plan assets 7 – Actual return on plan assets 38 34 Plan assets are comprised as follows: Equity instruments (%) 56 54 Cash (%) 14 7 Debt instruments (%) 15 30 Other (%) 15 9 100 100 The principal actuarial assumptions for accounting purposes were: Discount rate (%) 10.44 8.41 Expected return on plan assets (%) 10.44 8.41 Future salary increases (%) 9.44 7.64 Future pension increases (%) 9.16 5.64 Normal retirement age (%) 60 60
The sensitivity of the overall pension liability to changes in the weighted principal assumptions is: Impact on overall liability 2016 2015 Inflation rate (increase of 1%) 8.9 8.3 Inflation rate (decrease of 1%) 7.8 8
The expected contributions to the post-employment pension scheme for the year ending 31 March 2017 are R0.8 million.
POST-RETIREMENT MEDICAL BENEFITS Some Group companies have obligations to provide post-retirement medical benefits to their pensioners. The accumulated post-retirement medical aid obligation and the annual cost of those benefits were determined by independent actuaries. Any surplus or shortfall between the actuarially determined liability and the aggregate amounts provided is charged to profit or loss. The amounts recognised in the statement of financial position are as follows: Present value of unfunded obligation Group Company Figures in Rand million 2016 2015 2016 2015 Discovery Health members 589 707 158 182 Movement in the liability recognised in the statement of financial position: At the beginning of the year 707 620 182 162 Contributions paid (31) (21) (8) (7) Current-service costs 11 25 3 2 Interest cost 57 53 16 15 Reduction in obligation due to curtailment payment (100) – – – Deficit/surplus (55) 30 (35) 10 Balance at the end of the year 589 707 158 182
136 Industrial Development Corporation of South Africa Limited 21. RETIREMENT BENEFITS (continued) POST-RETIREMENT MEDICAL BENEFITS (continued) Group Company Figures in Rand million 2016 2015 2016 2015 The principal actuarial assumptions used for accounting purposes were: – Discount rate (%) 10.14 8.26 – – – General inflation rate (%) 8.17 6.38 – – – Medical inflation rate (%) 9.67 7.88 – – – Normal retirement age 60/65 60/65 Present value of unfunded obligation history 2012 265 135 2013 759 155 2014 620 162 2015 707 182 2016 589 158 Change in Change in past-service service cost Present value of unfunded obligation history liability plus asset Inflation rate (increase of 1%) 14.0 14.0 15.2 15.1 Inflation rate (decrease of 1%) 11.6 11.5 12.2 12.2 The expected contributions to post-employment medical plans for the year ending 31 March 2017 are R0.2 million.
22. OTHER FINANCIAL LIABILITIES Foreign loans 10 194 7 913 10 194 7 913 Domestic loans 17 790 16 092 28 793 25 653 27 984 24 005 38 987 33 566 Non-current liabilities Foreign loans 7 487 7 023 7 487 7 023 Domestic loans 15 307 10 136 13 927 8 852 22 794 17 159 21 414 15 875 Current liabilities Foreign loans 2 707 890 2 707 890 Domestic loans 2 483 5 956 14 866 16 801 5 190 6 846 17 573 17 691 27 984 24 005 38 987 33 566 Interest Foreign loans rate (%) – US Dollar 0 to 4.1 7 715 6 459 7 715 6 459 – Euro 0.25 to 2.68 2 462 1 424 2 462 1 424 – SA Rand-denominated 7.43 to 8.9 17 30 17 30 10 194 7 913 10 194 7 913 Maturity of foreign loans – due within one year 2 707 890 2 707 890 – due after one year but within five years 6 396 3 308 6 396 3 308 – due after five years 1 091 3 715 1 091 3 715 10 194 7 913 10 194 7 913 Maturity of domestic loans – no set dates of repayment – – 14 002 13 301 – due within one year 2 483 5 956 864 3 500 – due after one year but within five years 11 797 7 661 11 032 6 894 – due after five years 3 510 2 475 2 895 1 958 17 790 16 092 28 793 25 653
2016 Integrated Report 137 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
22. OTHER FINANCIAL LIABILITIES (continued) Group Company Figures in Rand million 2016 2015 2016 2015 Domestic loans secured loans* Nedbank Limited 1 295 1 779 – – Other secured loans 106 43 – – Unsecured loans Rand-denominated loans 3 900 3 900 3 900 3 900 Unemployment Insurance Fund Bond 1 997 3 996 1 997 3 996 Public Bond 6 000 2 500 6 000 2 500 Public Investment Corporation Green Bond 2 894 1 956 2 894 1 956 Other unsecured loans – 37 – – Loans from subsidiaries with no fixed terms of repayment Interest-free – – 11 466 10 480 Loans with no fixed terms of repayment Money market- related 1 598 1 881 2 001 2 286 Loans with no fixed terms of repayment Interest-free – – 535 535 Total domestic loans 17 790 16 092 28 793 25 653 Interest-bearing and non-interest-bearing loans – Non-current interest-bearing loans 22 782 17 138 21 414 15 875 – Current interest-bearing loans 5 190 6 846 5 573 6 676 27 972 23 984 26 987 22 551 – Non-current interest-free loans 12 21 – – – Current interest-free loans – – 12 000 11 015 12 21 12 000 11 015 27 984 24 005 38 987 33 566
* Secured by assets of subsidiary companies 23. PROVISIONS
Opening Utilised during Change in Figures in Rand million balance Additions the year discount factor Total RECONCILIATION OF PROVISIONS Group – 2016 Environmental rehabilitation 447 453 (142) 31 789 Trust fund (152) – (17) – (169) Other provisions 122 288 (266) 4 148 417 741 (425) 35 768 Group – 2015 Environmental rehabilitation 424 8 (11) 26 447 Trust fund (137) – (15) – (152) Other provisions 104 69 (52) 1 122 391 77 (78) 27 417 Company – 2016 Environmental rehabilitation 48 (25) 23 Company – 2015 Environmental rehabilitation 67 – (19) 48
ENVIRONMENTAL REHABILITATION LIABILITY African Chrome As a result of the processes used in the manufacture of the chemical products of the company, the ground water has become contaminated with a by-product, Chrome 6. In terms of minimum requirements of the National Water Act, No 37 of 1998, Part 5, section 20 and the Environment Conservation Act, No 73 of 1989, Part V, sub-sections 21 and 22, the company is required to remove the contaminated water and dispose of the waste material. The Industrial Development Corporation, as primary shareholder, stands security for the entire environmental provision until the land is fully rehabilitated.
138 Industrial Development Corporation of South Africa Limited 23. PROVISIONS (continued) ENVIRONMENTAL REHABILITATION LIABILITY (continued) African Chrome (continued) The rehabilitation process initially comprised two phases, namely Phase 1 and Phase 2. The entire process was expected to take a period of three years; with Phase 1 having commenced on 1 March 2012 and completed during the 2013/14 financial year. Phase 2 activities commenced during 2013/14 financial year after Phase 1 was completed. An amount of R18.5 million was expected to be incurred for Phase 2 activities. This provisional amount was based on previous historical costs and was adjusted for inflation. It was assumed that the amount incurred each year for Phase 2 activities would be settled at each respective year end. During the year tests were conducted to ascertain the success of Phase 1 in rehabilitating the surface of the soil. It was found that remediation works completed to date had effectively removed soil contamination from the surface of the site to concentration levels well below the recently gazetted South African Soil Screening Values (SSV2) for industrial land use. The site is therefore considered suitable for industrial re-development. However, the groundwater contamination has not been resolved, giving rise to an environmental liability for the IDC.
Insitu Chromium Reduction Technology During the year a new remediation technology (Insitu chromium reduction) for Chromium(Cr) VI groundwater contamination was explored. It was decided that Phase 2 would be substituted by this remediation method. Insitu chromium reduction is well proven remediation technology for CrVI contaminated groundwater which involves the injection or infiltration of a reductive reagent to precipitate and stabilise chromium in the less toxic form, Cr (III). The approach is as follows: Conduct laboratory and field trials to determine most suitable reagent; review all existing borehole and site infrastructure to determine suitability use for the remediation trials; design upgraded system and refine according to the results of remediation field trials; undertake full-scale field trials to test the performance of the selected reagent. Install a combination of injection wells and/or infiltration galleries in the hot spot areas associated with the South and North west plumes; sample and test existing monitoring wells at regular intervals for pH, ORP and CrVI to monitor the reaction rate and spread of the reagent; and it may be necessary to drill additional wells to ensure aquifer coverage. In addition the following supporting management measures have been proposed: Semi-annual groundwater sampling between the site and residential receptors for five years obtain a Waste License for Remediation Activities and undertake the basic assessment for authorisation. Interest rates relating to the following government bonds were used as the discount rates for calculating the present value of future cashflows: • R186 bond for current monthly site monitoring payments to Interwaste Environmental Solutions & Golder Associates over the next 10 years. • R157 bond for the operation of in situ reduction system for a period of two years. • R2 023 bond for the groundwater monitoring (10 sessions over five years). The government bonds were selected based on the approximate maturity date as at 31 March 2016. These rates were not adjusted for risks as there is no risk relating to the technology used to rehabilitate the land. All cash flows were adjusted for inflation forecasted by IDC Research and Information Department.
Foskor The company continually contributes to the Environmental Rehabilitation Trust to ensure that adequate funds are available to pay for mine closure and reclamation costs. The Environmental Rehabilitation Trust is an irrevocable trust under the control of the company. The financial assets held by the Trust are intended to fund the environmental rehabilitation liability of Foskor (Pty) Ltd and are not available for general purposes of the Group. The objective of the Trust is to act as the financial provider for expenditure that its member, Foskor (Pty) Ltd, is likely to incur in order to comply with the statutory obligation for the environmental rehabilitation. The Trust is exempt from tax in accordance with section 10(1)cP of the Income Tax Act, No 58 of 1962. A contingent liability has been recognised for the issuing of guarantees to the Department of Mineral Resources.
Columbus Columbus Joint Venture is a partnership between IDC, Samancor Limited and Highveld Steel. The provision is for the rehabilitation of dumps of different waste streams that were estimated at 4.3 million tonnes, which were not included in the sale of Middleburg Stainless Steel in January 2002, and accordingly each partner was liable for its share of the rehabilitation. The rehabilitation is expected to be completed in 2017.
Scaw South Africa Scaw South Africa has an obligation to incur restoration rehabilitation and environmental costs when environmental disturbance is caused by the development of ongoing production at a property. A provision is recognised for the present value of such costs. It is anticipated that the costs will be incurred over a period in excess of 20 years. The estimation of the environmental rehabilitation provision is a key area where management’s judgement is required.
2016 Integrated Report 139 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
24. SHARE-BASED PAYMENTS On 7 July 2009 Foskor and the IDC, as the controlling shareholder of Foskor, entered into a BEE transaction. In terms of the transaction the IDC legally sold a 15% interest in Foskor to Strategic Business Partners and Special Black Groups (collectively, the BEE partners), a 6% interest in Foskor to the Foskor Employee Share Option Plan (ESOP), and a 5% interest in Foskor to communities (the Community Trust) as part of Foskor’s efforts to achieve the objectives set out in the dti’s Broad-Based Black Economic Empowerment Codes of Good Practice (the dti Codes) and also to attain broad-based employee participation. The BEE Partners, employee beneficiaries of the ESOP and beneficiaries of the Community Trust are collectively referred to as the BEE Participants. The transaction was recognised as a share-based payment in terms of the requirements of IFRS 2 Share-based Payment and consequently the 26% interest in Foskor sold to the BEE participants has not been derecognised for accounting purposes in the Company or Group. Whilst certain rewards have been transferred to the BEE participants, the IDC remains substantially exposed to the risks of the Foskor shares through its funding of the transaction. The transaction will continue to be accounted for in this manner until such time as the preference shares have been redeemed by the BEE participants. The value of the share-based payments is determined using an appropriate valuation technique.
EQUITY-SETTLED SHARE-BASED PAYMENT RESERVE Group Company Figures in Rand million 2016 2015 2016 2015 At the beginning of the year 304 304 – – At the end of the year 304 304 – – Cash-settled share-based payment liability At the beginning of the year 18 24 62 176 Fair value adjustment through profit or loss 8 (6) 28 (114) At the end of the year 26 18 90 62
EQUITY-SETTLED RESERVE: WEIGHTED AVERAGE FAIR VALUE ASSUMPTIONS The fair value of services received in return for equity instruments granted is measured by reference to the fair value of the equity instruments granted. The estimate of the fair value of the equity instruments granted is measured based on the Monte Carlo Option Pricing model. The following weighted average assumptions were used in the share pricing models at grant date:
31 December Grant date 2009 Initial company value (exercise price) R’m 3 500 Average share price at grant date R 382.19 Annualised expected volatility (%) 43.00 Risk-free interest rate (%) 8.54 Dividend yield (%) 2.25 Strike price R 655.68
CASH-SETTLED SHARE-BASED PAYMENT LIABILITY: WEIGHTED AVERAGE FAIR VALUE ASSUMPTIONS The following weighted average assumptions were used in the share pricing models during the year: Group Company Figures in Rand million 2016 2015 2016 2015 Exercise price R‘m 3 500 3 500 3 500 3 500 Average share price at grant date R 382.19 382.19 382.19 382.19 Annualised expected volatility (%) 41.88 41.88 36.14 25.33 Risk-free interest rate (%) 8.37 8.37 7.80 7.92 Dividend yield (%) – – 2.22 2.22 Strike price R 594.80 594.80 546.27 546.27
140 Industrial Development Corporation of South Africa Limited Group Company Figures in Rand million 2016 2015 2016 2015 25. REVENUE Farming manufacturing and mining income 13 872 13 582 – – Interest received 2 346 2 206 3 128 2 581 Dividends received 2 723 3 104 1 886 2 238 Fee income 467 707 424 657 19 408 19 599 5 438 5 476 DIVIDENDS RECEIVED ON AVAILABLE- FOR-SALE FINANCIAL ASSETS – Listed 1 438 2 748 453 1 599 – Unlisted 152 62 152 62 – Associated companies – – 148 283 – Preference shares income 1 133 294 1 133 294 2 723 3 104 1 886 2 238 Dividends received from the investments made in terms of section 3(a) of the Industrial Development Act Sasol Limited 985 1 145 – –
26. INVESTMENT REVENUE INTEREST INCOME Cash and cash equivalents 570 533 423 416 Loans and advances to clients 1 762 1 641 2 703 2 157 Other 14 32 2 8 2 346 2 206 3 128 2 581
27. FINANCE COSTS PAID Current borrowings 1 150 1 205 1 364 1 086 Finance leases 3 3 – – (Profit)/loss on foreign currency borrowings (70) 92 (111) 66 Other interest paid 234 102 47 18 1 317 1 402 1 300 1 170
28. FEE INCOME Metal fees 169 371 169 371 Guarantee fees 15 14 15 14 Other contract-related fees 228 190 215 173 Other fees 55 132 25 99 Total fee income 467 707 424 657
29. NET CAPITAL GAINS/(LOSSES) Capital gains on disposal of available-for-sale investments 483 650 440 437 Capital losses on disposal of available-for-sale investments (30) (10) (30) (10) 453 640 410 427
30. OPERATING PROFIT/(LOSS) Is arrived at after taking into account the following: Revaluation of investment property 63 – – – Depreciation on property, plant and equipment 723 598 21 18 Impairment on property, plant and equipment 200 44 – – Loss/(profit) on sale of property, plant and equipment 17 1 – – Amortisation on intangible assets 29 7 – – Impairment on trade and other receivables 79 95 – – Research and development 10 6 10 5 Project feasibility expenses (289) 78 (289) 72 Impairments and write-offs on other financial assets 3 161 1 526 3 670 1 821 Employee costs 3 294 3 606 937 903 Operating lease rentals 47 27 4 4
2016 Integrated Report 141 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
Group Company Figures in Rand million 2016 2015 2016 2015
30. OPERATING (LOSS) PROFIT (continued) NET INCREASE/(DECREASE) IN IMPAIRMENTS Machinery and Equipment (540) 220 (474) 268 Industrial Infrastructure 1 039 170 1 059 177 New Industries 48 76 27 80 Agro-processing and Agriculture 133 125 136 91 Automotive and Transport Equipment 363 3 367 – Basic Metals and Mining 874 81 1 783 242 Clothing and Textiles 133 (223) (358) (441) Basic and Speciality Chemicals (60) 152 (59) 103 Chemical Products and Pharmaceuticals 199 (35) 199 (24) Media and Motion Pictures (884) (67) (1 059) (64) Light Manufacturing and Tourism (95) 52 (87) 63 Heavy Manufacturing 91 (211) 91 (310) Information Communication Technology (76) (120) (76) (109) Franchising 6 8 6 8 Construction 12 377 12 300 Other 58 122 58 75 1 301 730 1 625 459 BAD DEBTS WRITTEN OFF/(RECOVERED) Machinery and Equipment 135 9 135 9 Industrial Infrastructure 11 – 11 – New Industries 40 5 40 4 Agro-processing and Agriculture 20 23 20 23 Automotive and Transport Equipment 7 – 7 – Basic Metals and Mining 181 89 181 88 Clothing and Textiles – 250 316 655 Basic and Speciality Chemicals 136 63 (3) 63 Chemical Products and Pharmaceuticals 17 4 17 4 Media and Motion Pictures 1 053 86 1 061 86 Light Manufacturing and Tourism 210 (4) 210 (4) Heavy Manufacturing 13 94 13 273 Information Communication Technology – 148 – 148 Franchising 7 3 7 3 Construction – 11 – 10 Other 30 15 30 – 1 860 796 2 045 1 362
31. AUDITORS’ REMUNERATION Fees 21 18 9 7
32. TAXATION MAJOR COMPONENTS OF THE TAX (INCOME) EXPENSE Current Local income tax – current period 156 105 301 105 Foreign income tax – (1) – – 156 104 301 105 Deferred Deferred tax – current year (316) (90) (326) (51) (160) 14 (25) 54 Reconciliation of the tax expense Reconciliation between applicable tax rate and average effective tax rate. South African normal tax rate (%) 28 28 28 28 The normal rate of taxation for the year has been adjusted as a consequence of: – dividend income (%) (1 208) (53) (352) (37) – capital gains and losses (%) (182) – (76) – – provisions and impairments (%) 1 414 26 681 30 – disallowed/exempt items (%) (315) (26) (297) (18) Effective tax rate (%) (263) (25) (16) 3
142 Industrial Development Corporation of South Africa Limited 33. DIRECTORS’ EMOLUMENTS NON-EXECUTIVE DIRECTORS: FEES FOR SERVICES AS DIRECTORS
Figures in Rand thousands 2016 2015 Ms MW Hlahla Retired on 29 January 2015 67 742 Ms LJ Bethlehem1 301 486 Mr JA Copelyn Retired on 29 January 2015 – 241 Mr BA Dames 322 299 Ms LL Dhlamini Resigned on 31 August 2014 – 98 Mr RM Godsell 178 259 Mr LR Pitot Retired on 29 January 2015 21 473 Ms BA Mabuza Appointed Chairperson on 29 January 2015 690 532 Dr SM Magwentshu-Rensburg 326 335 Mr SK Mapetla Retired on 29 January 2015 21 378 Ms MP Mthethwa 304 351 Mr ZJ Vavi Retired 29 February 2016 288 158 N Mnxasana 441 – NDB Orleyn 340 – Mr B Molefe2 Appointed 1 February 2015 64 – Mr NE Zalk3 – – 3 363 4 352
1. Ms L Bethlehem and Mr JA Copelyn's fees are paid directly to HCI Limited 2. Mr Molefe’s fee is paid to the Transnet Foundation. 3. Mr NE Zalk is employed by the dti and does not earn directors' fees for services rendered to the IDC
EXECUTIVE
Contributions to medical aid, Long-term Non- retirement incentive pensionable* Performance benefits Total Figures in Rand thousands Emoluments bonus allowance bonus and other R’000 2016 IDC 28 957 3 801 4 684 – 7 312 44 754 MG Qhena 5 255 1 156 1 077 – 1 234 8 722 GS Gouws 3 535 702 616 – 1 604 6 457 SAU Meer 2 529 437 386 – 393 3 745 K Schumann1 2 320 430 406 – 664 3 802 AP Malinga 2 054 361 377 – 703 3 494 PB Makwane 2 377 372 368 – 751 3 869 RJ Gaveni 1 688 226 290 – 501 2 706 DA Jarvis 1 936 81 308 – 317 2 641 KC Morolo11 1 727 – – – 393 2 120 MP Mainganya 2 380 37 371 – 332 3 120 PZ Luthuli2 1 649 – 253 – 223 2 126 NS Veleti3 1 524 – 232 – 196 1 952 Foskor 18 266 2 008 76 – 4 009 24 359 MA Pitse4 884 632 – – 398 1 914 G van Wyk8 1 983 – – – 395 2 378 J Morotaba5 3 016 108 – – 803 3 927 G Ferns7 1 898 – – – 574 2 472 SMS Sibisi 2 462 405 – – 503 3 370 XS Luthuli 2 583 400 – – 649 3 632 K Cele 2 306 388 – – 392 3 086 NM Gokhale6 482 – – – 6 488 DP Singh 2 023 – – – 229 2 252 MA Dindar9, 10 630 76 76 – 60 842 1. Contract ended on 30 April 2016 2. Appointed on 1 July 2015 3. Appointed on 1 September 2015 4. Contract expired 30 June 2015 5. Contractual sign-on bonus only paid in June 2015 6. Contract expired 30 June 2015 7. Resigned 31 December 2015 8. Contract from 1 July 2015 to 31 March 2016 9 Appointed 1 January 2016 10. Seconded to the company by IDC 11. Resigned on 30 April 2016 * Non-guaranteed performance-based allowance
2016 Integrated Report 143 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
33. DIRECTORS’ EMOLUMENTS (continued) EXECUTIVE (continued) Contributions to medical aid, Long-term retirement incentive Performance benefits Total Figures in Rand thousands Emoluments bonus bonus and other R’000 2016 Scaw South Africa 19 685 – 1 680 4 518 25 883 U Khumalo 3 665 – 298 568 4 531 MM Hanneman 3 445 – 275 1 501 5 221 S van Wyk 1 926 – 154 723 2 803 G van Wyk 495 – 198 – 693 B Khumalo 2 069 – 165 336 2 570 G Katergarakis 1 620 – 129 289 2 038 R Abrahams 1 604 – 130 288 2 022 V Reddy 1 339 – 107 239 1 685 D Ndlovu 1 338 – 107 234 1 679 P Malaza 2 184 – 117 340 2 641 sefa 8 535 506 1 251 2 155 13 126 TR Makhuva10 1 966 258 283 505 3 012 V Matsiliza 1 476 – 183 246 1 905 ZR Coetzee10 1 564 248 253 623 2 688 N Shwala 1 345 – 163 190 1 698 RV Ralebepa 1 451 – 184 270 1 905 GN Nadasan 1 412 – 185 321 1 918 76 122 6 315 7 691 17 993 108 122
2015 IDC 19 316 – 9 468 6 989 35 773 MG Qhena 4 173 – 2 755 2 391 9 319 GS Gouws 2 816 – 1 580 948 5 344 SAU Meer 2 110 – 959 809 3 878 K Schumann 1 854 – 952 626 3 432 AP Malinga 1 702 – 913 806 3 421 PB Makwane 1 968 – 871 344 3 183 RJ Gaveni 1 418 – 695 374 2 487 K Morolo 1 704 – – 386 2 090 PM Mainganya 1 172 – 553 170 1 895 LP Mondi 399 – 190 135 724 Foskor 21 047 6 546 – 6 195 33 788 MA Pitse 3 476 4 388 – 1 473 9 337 J Morotoba 2 860 – – 2 175 5 035 N Nkomzwayo 1 439 2 158 – 405 4 002 G Ferns 2 457 – – 454 2 911 SMS Sibisi 2 328 – – 513 2 841 XS Luthuli 2 441 – – 385 2 826 K Cele 2 192 – – 417 2 609 NM Gokhale 1 889 – – 24 1 913 SR Golmari 1 476 – – 98 1 574 DP Singh 489 – – 251 740 Scaw South Africa 20 144 – 4 533 3 797 28 474 U Khumalo 3 575 – 1 278 571 5 424 MM Hanneman 3 300 – 1 180 824 5 304 S van Wyk 1 845 – 483 441 2 769 G van Wyk 2 374 – – 379 2 753 B Khumalo 1 982 – 359 333 2 674 G Katergarakis 1 552 – 406 277 2 235 R Abrahams 1 559 – 317 281 2 157 V Reddy 1 283 – 278 234 1 795 D Ndlovu 1 282 – 232 238 1 752 P Malaza 1 392 – – 219 1 611
10. Seconded to the company by IDC
144 Industrial Development Corporation of South Africa Limited EXECUTIVE (continued) Contributions to medical aid, Long-term retirement incentive Performance benefits Total Figures in Rand thousands Emoluments bonus bonus and other R’000 2015 sefa 8 419 – 1 626 1 387 11 432 TR Makhuva 1 612 – 811 522 2 945 V Matsiliza 1 413 – 231 229 1 873 ZR Coetzee 824 – 429 394 1 647 LG Mashishi 1 570 – – 74 1 644 N Shwala 1 026 – 155 45 1 226 L van Lelyveld 515 – – 24 539 RV Ralebepa 362 – – 56 418 D Hansen 397 – – – 397 P Swanepoel 327 – – 36 363 GN Nadasan 196 – – 7 203 A Dirks 124 – – – 124 L van Schalkwyk 53 – – – 53 68 926 6 546 15 627 18 368 109 467
34. OTHER COMPREHENSIVE INCOME
COMPONENTS OF OTHER COMPREHENSIVE INCOME Share of other comprehensive income of Gross Tax associates Net Group – 2016 Items that will not be reclassified to profit or loss Remeasurements on net defined benefit liability/asset 59 (13) – 46 Movements on revaluation Gains (losses) on property revaluation 73 (13) – 60 Total items that will not be reclassified to profit or loss 132 (26) – 106 Items that may be reclassified to profit or loss Exchange differences on translating foreign operations Exchange differences arising during the year 129 – 631 760 Available-for-sale financial assets adjustments Gains and losses arising during the year (6 087) (290) (101) (6 478) Total items that may be reclassified to profit or loss (5 958) (290) 530 (5 718) Total (5 826) (316) 530 (5 612)
Company – 2016 Items that will not be reclassified to profit or loss Remeasurements on net defined benefit liability/asset 40 (9) – 31 Movements on revaluation Gains/(losses) on property revaluation 17 (4) – 13 Total items that will not be reclassified to profit or loss 57 (13) – 44 Items that may be reclassified to profit or loss Available-for-sale financial assets adjustments Gains and losses arising during the year (7 631) 615 (15) (7 031) Total items that may be reclassified to profit or loss (7 631) 615 (15) (7 031) Total (7 574) 602 (15) (6 987)
2016 Integrated Report 145 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
35. NATURE AND PURPOSE OF RESERVES FOREIGN CURRENCY TRANSLATION RESERVE The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations, as well as the effective portion of any foreign currency differences arising from hedges of a net investment in a foreign operation.
REVALUATION RESERVE The revaluation reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the assets are derecognised or impaired. The revaluation reserve also relates to the revaluation of property, plant and equipment.
ASSOCIATED ENTITIES RESERVE The associated entities reserve comprises the cumulative net changes of equity-accounted investment, directly to other comprehensive income.
COMMON CONTROL RESERVE The common control reserve relates to the transfer of Small Enterprise Finance Agency from the Economic Development Department to the IDC.
SHARE-BASED PAYMENT RESERVE The share-based payment reserve relates to the equity-settled share-based portion of the Foskor BEE transaction, entered into on 7 July 2009. Please refer to Note 24 for further detail.
36. FINANCIAL AND OPERATING LEASES FINANCE LEASES – GROUP AS LESSEE The Group has leases classified as financial leases principally for property. Future minimum lease payments payable under finance leases, together with the present value of minimum lease payments, are as follows: Group Company Figures in Rand million 2016 2015 2016 2015 Land and buildings – due within one year 6 5 – – – due after one year but within five years 15 14 – – – due after five years 5 7 – – Total minimum lease payments 26 26 – – Amount representing finance charges (8) (10) – – Present value of minimum lease payments 18 16 – – Current portion 4 3 – – Long-term portion 14 13 – – 18 16 – –
Foskor The finance lease is between Foskor (Pty) Ltd and uMhlathuze Water Board for an effluent pipeline. The lease liability is effectively secured, as the rights to the leased asset revert to the lessor in the event of default. The lease is over a 20-year period with 10 years remaining as at 31 March 2016. Foskor has sole use of the effluent pipeline and pays for the maintenance. The lease is at a fixed rate of 14.4% per annum. Omega Refrigeration The company’s obligation under the finance lease has been settled during the current financial year. Blue Mountain Berries These loans are repayable in monthly installments of R227 351 which includes interest at rates between. 9.05% and 9.55% per year.
OPERATING LEASES – GROUP AS LESSEE Certain items of computer and office equipment are leased by the Group. Commitments for future minimum rentals payable under non-cancellable leases are as follows: Group Company Figures in Rand million 2016 2015 2016 2015 – due within one year 32 28 2 2 – due after one year but within five years 99 105 – 2 – due after five years – 302 – – 131 435 2 4
The Company leases network printers and scanners under one agreement, which terminates in 2016.
146 Industrial Development Corporation of South Africa Limited 37. CASH USED IN OPERATIONS Group Company Figures in Rand million 2016 2015 2016 2015 Profit before taxation 63 1 667 152 1 721 Income from equity-accounted investments (557) (656) – (3) Adjustments for: Impairment of goodwill relating to associated entities (30) (54) – – Amortisation of intangibles assets 32 7 – – Depreciation of property, plant and equipment 723 598 21 18 Loss/(profit) on sale of assets 17 1 – – Impairment/(reversal) of property, plant and equipment 200 44 – – Net capital gains (453) (640) (410) (427) Interest received (2 346) (2 206) (3 128) (2 581) Dividends received (1 590) (2 810) (753) (1 944) Dividends received preference share options (1 133) (294) (1 133) (294) Finance costs paid 1 387 1 310 1 411 1 104 Finance cost: exchange gains and losses (70) 92 (111) 66 Project feasibility expenses – – (27) 6 Specific and portfolio impairments 3 161 1 526 3 670 1 821 Fair value adjustment on share-based payment – – 28 (114) Movements in retirement benefit assets and liabilities (118) 89 (24) 20 Movements in provisions 351 26 (25) (19) Other non-cash items (684) (28) (684) (28) Changes in working capital: Inventories 261 1 – 9 Trade and other receivables 413 111 155 (163) Derivative assets (65) 67 (62) 60 Trade and other payables (24) 216 (317) 298 (Increase)/decrease in non-current assets held-for-sale (53) (39) – – (515) (972) (1 237) (450)
38. BUSINESS COMBINATIONS Group Company Figures in Rand million 2016 2015 2016 2015 Other entities acquired – ADC Cables Fair value of assets acquired and liabilities assumed Property, plant and equipment 197 – – – Inventories 7 – – – Trade and other receivables 16 – – – Cash and cash equivalents 14 – – – Other liabilities (230) – – – Trade and other payables (39) – – – Total identifiable net assets (35) – – – Fair value of equity interest held before the business combination 35 – – –
39. TAX PAID Balance at beginning of the year 261 (41) 260 (42) Current tax for the year recognised in profit or loss (156) (104) (301) (105) Balance at the end of the year (205) (261) (200) (260) (100) (406) (241) (407)
2016 Integrated Report 147 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
Group Company Figures in Rand million 2016 2015 2016 2015
40. COMMITMENTS In respect of: Undrawn financing facilities approved 34 177 27 645 33 928 27 442 Undrawn guarantee facilities approved 1 789 1 087 1 789 1 087 Capital expenditure approved by subsidiaries 87 263 – – – Contracted 87 263 – – Capital expenditure approved by equity-accounted investments 755 398 – – – Contracted 363 217 – – – Not contracted 392 181 – – Total commitments 36 808 29 393 35 771 28 529 Less: counter-guarantees obtained from partners in respect of financing and guarantees to be provided to major projects (221) (182) (221) (182) Commitments net of counter-guarantees 36 587 29 211 35 550 28 347 Commitments will be financed by loans and internally generated funds. 41. GUARANTEES Guarantees issued in favour of third parties in respect of finance provided to industrialists 1 984 1 265 1 789 1 061 Total industrial financing guarantees 1 984 1 265 1 789 1 061 1 984 1 265 1 789 1 061 Sundry guarantees issued by subsidiaries 541 541 – – Guarantees issued by equity-accounted investments 17 22 – – Guarantees 2 542 1 828 1 789 1 061
42. CONTINGENCIES
CONTINGENT LIABILITIES OF SUBSIDIARIES Foskor (Pty) Ltd The company had mine rehabilitation guarantees amounting to R495 million (2015: R455 million) at year-end. In line with the requirements set out by the Department of Mineral Resources (DMR), this guarantee amount was in place at 31 March 2016. These guarantees and the agreement reached with the DMR were based on the environmental rehabilitation and closure costs assessment that was performed during the 2016 financial year. The assessments are performed on a three-year rolling basis, with the next assessment due in 2017. Estimated scheduled closure costs for the mine are R526 million. For unscheduled or premature closure, the DMR, in accordance with the Minerals and Petroleum Resources Development Act, requires Foskor (Pty) Ltd to provide for the liability of R616 million in the form of guarantees and cash. The R616 million is covered by guarantees totalling R495 million and investment assets totalling R169 million, resulting in an overprovision of R49 million.
CONTINGENT LIABILITIES OF EQUITY-ACCOUNTED INVESTMENTS Hans Merensky Holdings (Pty) Ltd Land claims against property held by the Group have been gazetted in terms of the Restitution of Land Rights Act, 1994. In the opinion of the directors, after taking appropriate legal advice, the outcome of such actions cannot be reliably predicted and measured at reporting date and consequently no impairment charge has been recognised. Gazetted land claims will have a financial impact if it is probable that there will be an outflow of economic interest from the Hans Merensky Group. When the financial loss becomes probable and can be reliably measured, an impairment charge will be recognised.
The York Timber Organisation Ltd (York) Suretyship: York participates in pool banking facilities granted by FirstRand Bank Limited. As such, the York has provided unlimited suretyship in favour of the FirstRand Bank Limited in respect of its obligations to the bank. Obligations are R142 million (2015: R142 million), R24 million being the Group’s exposure thereto.
148 Industrial Development Corporation of South Africa Limited 43. RELATED PARTIES
The government of South Africa through the Economic Shareholder: Development Department Financing Directors’ interests balance Financing approved 2016 2015 Interest/ Type of financing/ Year of Name Company R’m R’m R’m funding rate repayment terms Director’s interest approval Mr SK Afrika 18 – 18 7% Working capital facility Mr SK Mapetla owns 2010 Mapetla Biopharma 41% of Afrika Biopharma Investment Investment Ms MW Clidet 688 T/A 14 14 14 RATIRR of 8% Redeemable Ms MW Hlahla owns 2007 Hlahla Praxley preference shares 14% in Praxley Consortium Five Consortium Five (Pty) Ltd (Pty) Ltd Mr JA Cape Town Film 84 54 64 Prime + 1% Normal loan The controlling 2010 Copelyn Studio (Pty) Ltd shareholders of Cape Town Studio are Sabido Investments (Pty) Ltd (Sabido) and Videovision Dreamworld Sabido (42.5% shareholding) is the holding company of ETV and part of the JSE-listed group Hosken Consolidated investments Limited (“HCI”). Mr Copelyn currently serves as CEO of HCI Ilangalethu 1 000 60 60 R186 + (3.2% Senior debt loan HCI has a 10% stake in 2013 (Pty) Ltd to 3.4%) Ilangalethu (Pty) Ltd. Mr Copelyn currently serves as CEO of HCI 1 484 – – RATIRR of Redeemable 2013 7.04% preference shares Kai Garib Solar 775 – – RATIRR of 10% Normal loan HCI is an investor in Kai 2015 SPV Garib Solar SPV. Mr Copelyn currently serves as CEO of HCI 720 – – 25% stake Ordinary shares 2015 Formex 80 30 30 RATIRR of 8% Redeemable HCI has a 100% stake in 2011 Industries preference shares Formex. Mr Copelyn (Pty) Ltd serves as CEO of HCI Ms LJ Cape Town Film 84 54 64 Prime + 1% Normal loan The controlling 2010 Bethlehem Studio (Pty) Ltd shareholders of Cape Town Studio are Sabido Investments (Pty) Ltd (Sabido) and Videovision Dreamworld Sabido (42.5% shareholding) is the holding company of ETV and part of the JSE-listed group HCI. Ms Bethlehem is a senior manager at HCI Formex 80 30 30 RATIRR of 8% Redeemable HCI has a 100% stake in 2011 Industries preference shares Formex. Ms Bethlehem (Pty) Ltd is a senior manager at HCI
2016 Integrated Report 149 4 ANNUAL FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
43. RELATED PARTIES (continued)
The Government of South Africa through the Economic Shareholder: Development Department Financing Directors’ interests balance Financing approved 2016 2015 Interest/ Type of financing/ Year of Name Company R’m R’m R’m funding rate repayment terms Director’s interest approval Ms LJ Ilangalethu 1 000 60 60 R186 + (3.2% to Senior debt loan HCI has a 10% stake in 2013 Bethlehem (Pty) Ltd 3.4%) Ilangalethu (Pty) Ltd. Ms Bethlehem is a senior manager at HCI 1 484 – – RATIRR of Redeemable 7.04% preference shares Kai Garib Solar 775 – – RATIRR of 10% Normal loan HCI is an investor in Kai 2015 SPV Garib Solar SPV. Ms Bethlehem is a senior manager at HCI 720 – – 25% stake Ordinary shares 2015 Ms T Le Sel Research 165 165 – Prime + 1% Normal loan Ms Orleyn is a 2015 Orleyn (Pty) Ltd shareholder in Peotena Group Holdings via the Mamaswa Family Trust. Peotena Private Equity is a subsidiary of Peotena Group Holdings. Indirect shareholder in Le-Sel via Trinitas Fund General Partner (Trinitas). Trinitas has a 37.5% equity interest in Le-Sel Research National sphere of government The Land and Agricultural 400 77 86 0% Loan repayable on 2016 Development Bank of SA Ltd 31 March 2022
RELATED PARTY TRANSACTIONS Non-financing transactions – Rendering of services Group Company Figures in Rand million 2016 2015 2016 2015 Eskom Limited 747 754 – – Transnet Limited 894 892 – – South African Airways (Pty) Limited 8 21 4 20 Telkom Limited 7 7 1 1 National Ports Authority 47 43 – – SA Post Office Limited – 1 – 1 Rand Water 2 5 – – 1 705 1 723 5 22
150 Industrial Development Corporation of South Africa Limited ACRONYMS AND ABBREVIATIONS
ADB African Development Bank AfD Agence Française de Développement ALCO Asset and Liability Committee APAP Agricultural Policy Action Plan BAC Board Audit Committee BAIC Beijing Automotive International Corporation B-BBEE Broad-Based Black Economic Empowerment BCM Business Continuity Management BEE Black Economic Empowerment BIC Board Investment Committee BR&SC Board Risk and Sustainability Committee CaR Capital at Risk CCB China Construction Bank CDB China Development Bank CDP Carbon Disclosure Project CEO Chief Executive Officer CGU Cash Generating Unit CMT Cut, make and trim COSO Committee of Sponsoring Organisations of the Treadway Commission CRM Customer Relationship Management CSE Consolidated structured entity CSI Corporate Social Investment CVA Culture Values Assessment DFI Development Finance Institution DSI Development Sustainability Index DMR Department of Mineral Resources ECIC Export Credit Insurance Corporation of South Africa Limited EDD Economic Development Department EIB European Investment Bank ERM Enterprise Risk Management ERM Environmental Risk Management ERMF Enterprise-wide Risk Management Framework ESOP Employee Share Option Plan ESRR Environmental and Social Risk Rating EXCO Executive Management Committee FCF Free cash flow FOCAC Forum on China-Africa Cooperation GDP Gross domestic product GEAR Growth Employment and Redistribution GEC Governance and Ethics Committee GHG Greenhouse gas GRI Global Reporting Initiative Guidelines HC Human Capital HCI Hosken Consolidated Investments HCNC Human Capital and Nominations Committee IA Internal Audit IASB International Accounting Standards Board ICT Information and communications technology IDC Industrial Development Corporation IFRS International Financial Reporting Standards
2016 Integrated Report 151 ACRONYMS AND ABBREVIATIONS
IMC Investment Monitoring Committee IPAP Industrial Policy Action Plan IPCC Inter-governmental Panel for Climate Change IRC Integrated Reporting Committee ISAE International Standards for Assurance Engagements IT Information Technology JSE Johannesburg Stock Exchange KfW Kreditanstalt für Wiederaufbau KPI Key performance indicator LDC Loss Data Collection LTI Long-term incentive MoU Memorandum of Understanding NAIL New Africa Investments Limited Nampak Nampak Products Limited NAV Net asset value NCI Non-controlling interests NCPC National Cleaner Production Centre NDP National Development Plan NDT National Department of Tourism NGP New Growth Path NIP National Infrastructure Plan NPL Non-performing loan PACS Payment and collection system PC Palabora Copper PE Price earning PFMA Public Finance Management Act PGM Platinum Group Metal PIC Public Investment Corporation PIMD Post-Investment Monitoring Department PPP Public Private Partnership PWC Pricewaterhouse Coopers RCSA Risk and Control Self-Assessment RDP Reconstruction and Development Programme REIPPPP Renewable Energy Independent Power Producer Procurement Programme SA South Africa SBU Strategic Business Unit sefa Small Enterprise Finance Agency SIC Standard Industrial Classification SME Small and Medium Enterprise SNG SizweNtsalubaGobodo SOE State-owned Enterprise STI Short-term incentive TVET Technical Vocational Education and Training UIF Unemployment Insurance Fund UNEPFI The United Nations Environmental Programme for Financial Institutions
152 Industrial Development Corporation of South Africa Limited CONTACT US
PHYSICAL AND POSTAL ADDRESSES
1. EASTERN CAPE East London: 2nd Floor Block B, Chesswood Office Park, Winkley Str, Berea, East London PO Box 19048, Tecoma 5214 Tel: 043 721 0733/4 | Fax: 043 721 0735 | Email: [email protected]
Port Elizabeth: Southern Life Gardens, Block A (Ground) 70 2nd Avenue, Newton Park, PE PO Box 27848, Greenacres, Port Elizabeth 6057 Tel 041 363 1640 | Fax: 041 363 2349 | Email: [email protected]/[email protected]
Mthatha: Ground Floor, ECDC House, 7 Sisson Street, Fort Gale, Mthatha 5201 Tel: 047 504 2200 | Fax: 047 531 1587 | Email: [email protected]
2. FREE STATE Bloemfontein: Mazars Building, 46, 1st Avenue, Westdene, Bloemfontein Private Bag X 11, Suite 25, B hof, 9324 Tel: 051 411 1450 | Fax: 051 447 4895
3. KWA-ZULU NATAL Durban: Suite 2101, 21st Floor, The Embassy Building, 199 Anton Lembede Str., Durban. PO Box 2411, Durban, 4000 Tel: 031 337 4455 | Fax: 031 337 4790 | Email: [email protected]
Pietermaritzburg: 1st Floor, ABSA Building 15 Chatterton Road, Pietermaritzburg. PO Box 2411, Durban, 4000 Tel: 033 328 2560 | Fax: 033 342 5341 | Email: [email protected]
4. LIMPOPO Polokwane: Suite 18, Biccard Office Park, 43 Biccard Street Postnet Suite 422, Private Bag X9307, Polokwane 0699. Tel: 015 299 4080 - 4099 | Fax: 015 295 4521 | Email: [email protected]
5. MPUMALANGA Nelspruit: Maxsa Building, 15 Ferreira Street, Suite 702, 7th Floor, Mbombela PO Box 3724, Mbombela, 1200 Tel: (013) 752 7724 | Fax: (013) 752 8139 | Email: [email protected]
6. NORTHERN CAPE Kimberley: Sanlam Business Complex, 13 Bishops Avenue, Kimberley 8301 PO Box 808, Kimberley, 8300 Tel: 053 807 1050 | Fax: 053 832 7395 | Email: [email protected]
Upington: De Drift Plaza, Block 6, Olyvenhoutsdrift Settlement, Louisvale Avenue, Upington, 8800 Tel: 054 337 8600 | Fax: 054 334 0835
7. NORTH WEST Rustenburg: 1st Floor, Sunetco Building, 32B Heystek Street, Rustenburg. Postnet Suite 290, Private Bag X 82245, Rustenburg 0030 Tel: 014 591 9660 /1 | Fax: 014 592 4485 | Email: [email protected]
Brits: Suite 108, Safari Centre, 28 Van Velden Street, Brits 0250 Tel: 012 252 0008 | Fax: 012 252 4657 | Email: [email protected]
Mahikeng: 1B Mikro Plaza, cnr First Street / Bessemer Street, Industrial Sites Mafikeng Postnet Suite 89, Private Bag X2230, Mafikeng, 2791 Tel: 018 397 9942 | Email: [email protected]
8. WESTERN CAPE Cape Town: 2817, 28th Floor ABSA Centre, 2 Riebeeck Street Cape Town PO Box 6905, Roggebaai, 8012 Tel: 021 421 4794 | Fax: 021 419 3570 | Email: [email protected]
2016 Integrated Report 153 SATELLITE OFFICES
1. FREE STATE Phuthaditjhaba: Mapoi Road, Phuthaditjaba, 9869 Tel: 051 411 1450
Welkom: 1 Reinet Street, Welkom, 9460 Tel: 051 411 1450
2. KWA-ZULU NATAL Richards Bay: Suite 17, Partidge Place, cnr Lira and Tasselberry Road, Richards Bay, 3900 Tel: 031 337 4455
3. LIMPOPO Thohoyandou: Seda office:Old Mutual Building, Old Group Scheme Offices, Mphephu Road, Thohoyandou 7950 Tel: 015 299 4080
Tzaneen: 1st Floor Prosperitas Building, 27 Peace Street, Tzaneen (Seda), 0850 Tel: 015 299 4080
4. MPUMALANGA eMalahleni: 23 Botha Avenue cnr Rhodes Street, Hi-Tech House, eMalahleni 1035 Tel: 013 752 7724
Secunda: South Wing, Mnuicipal Building Lurgi Square, Secunda, 2302 Tel: 013 752 7724
5. NORTH WEST Klerksdorp: Office 35, West Ebd Building, 51 Leask Street, Klerksdorp, 2571 Tel: 018 462 6586 | Fax: 018 462 5061 (Dr KK District Municipality Economic Agency)
Vryburg: 83 Vry Street, Vryburg, 8601 Tel: 053 927 0590 | Fax: 053 927 0590
6. WESTERN CAPE George: Beacon Place, 125 Meade Street, George 6529 Tel: 021 421 4794
154 Industrial Development Corporation of South Africa Limited NOTES
2016 Integrated Report 155 NOTES
156 Industrial Development Corporation of South Africa Limited ADMINISTRATION
DIRECTORS REGISTERED OFFICE Executive IDC MG Qhena (CEO) 19 Fredman Drive GS Gouws (alternate) Sandown 2196 Non-Executive PO Box 784055 BA Mabuza (Chairperson) Sandton 2146 LI Bethlehem Telephone +27 (11) 269 3000 BA Dames Fax: +27 (11) 269 3116 RM Godsell Email: [email protected] A Kriel Email: [email protected] SM Magwentshu-Rensburg Call centre contact number: 0860 693 888 NP Mnxasana Website: www.idc.co.za B Molefe COMPANY SECRETARY M More P Makwane PM Mthethwa ND Orleyn Registration number: NE Zalk 1940/014201/06
AUDITORS KPMG (Johannesburg) SizweNtsabulaGobodo (Johannesburg) RP: 316/2016 ISBN: 987-0-621-44012-6
www.idc.co.za